oswal woolen mills
TRANSCRIPT
Working Capital ManagementOf
SHERPUR CHOWNK, LUDHIANA
Submitted To: Submitted By:Ms. Simranjeet Kaur ShwetaMalhotra 7NBLU011
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Working Capital ManagementOf
SHERPUR CHOWNK, LUDHIANA
By(Shweta Malhotra)(M.B.A 2007-2009)
A report submitted in partial fulfillment ofthe requirements of
THE MBA PROGRAM(The Class of 2009)
INC
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Preface
The need to acquire knowledge and to develop the skills of
decision making in the field of financial management has never been
great as it is today infact the rapid industrialization that is taking place in
the country has brought an urgency for rapid development of managerial
abilities in graduate post graduate programs.
For such as educational activities it is essential not only to have
teaching material of sufficient depth and breathe of coverage but also to
provide it in a way that lends itself to be adapted to the most effective
pedagogy.
A project entitled “Working Capital Management of Oswal
Woolen Mills Ltd.” under the guidance of Ms. Simranjeet Kaur
(Project Guide) was undertaken by me in partial fulfillment of
requirement for degree of Master in Business Administration. I hope this
study will be useful for academic as well as practical purpose.
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ACKNOWLEDGEMENT
First and foremost, I would like to express my deep sense of gratitude to
my esteemed supervisor, senior lecturer of Soft Skills Department of
INC, Ludhiana Ms. Simranjeet Kaur under whose competent guidance
and affectionate encouragement, I have been able to complete this
project. She needs a special mention in this project and I am greatly
indebted to her for her kind behaviour, sympathetic attitude, rich
experience and profound learning. Indefatigable fact finding zeal was a
source of constant inspiration.
It is impossible to acknowledge in the words the help, love & affection
that I have received from members of OSWAL WOOLLEN MILLS
LTD. who helped me in endeavour.
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CONTENTS
Chapter No Topics
Chapter 1 Summary of Project
Chapter 2 Objectives of the study
Limitations
Chapter 3 Research Methodology
Chapter 4 Review of Literature
Introduction of Hatchback Cars
Company Portfolio
Chapter 5 Data Analysis & Interpretation
Chapter 6 Recommendations & Suggestions
Chapter 7 Conclusion
Chapter 8 Bibliography
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SUMMARY OF PROJECT
The Nahar Group- A renowned name in Indian industry is heading fast in
future with its wide range of products. Oswal Group started as a sock-knitting unit
in a rented room in Ludhiana. Although the beginning was small but the vision was
big. The burning desire to evolve grows and boundless enthusiasm made them to
achieve heights of success.
The Project undertaken is “Working Capital Management” and “Various
Methods of Funding of Working Capital”.
The project “various methods of funding of working capital” includes the
calculation of working capital for the funding purpose and deciding and opting for
the various funding methods of the working capital of OWM.
This project is done under the Finance department under Mr. R.M. Sood
Finance Controller of the company and is related to major specialization Finance.
In this project well acquaintance with the procedure followed in Oswal
Woollen Mills Ltd. for the management of working capital and different ways and
necessities of funding of working capital. It includes the various loans and funds
that are available for the funding of working capital for the exporters.
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OBJECTIVES OF STUDY
1. Analyze the operating cycle of the company.
2. Analyze the trend in various components of working capital.
3. Analyze the different aspects of funding of working capital.
OBJECTIVES
The basic objective behind this project is to provide an analytical overview of
“Working Capital Management” at oswal woollen mills limited by bringing into use
various theoretical tools & skills which have been studied. This include studying &
analyzing various financial data over a period of 5 years with the aim of gaining
useful insight into skill needed for the controlling the movement of working capital.
Specific Objective:
The broad areas that have been analyzed are as follows:
1. OPERATING CYCLE:
The operating cycle of the unit has been calculated for the past 3 years with the aim of
studying trends & commenting on the efficiencies achieved & the inefficiencies that
have developed.
2. RATIO ANALYSIS:
The ratios calculated & analyzed have been broadly divided under four parameters
a) Ratio to analyze the liquidity position.
b) Profitability ratios.
c) Ratio to calculate the efficiency of working capital management.
d) Ratios to analyze the structural health of the divisions’ working capital structure.
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3. CASH MANAGEMENT:
To study the cash management of MIL regarding its collection, lead time like in case
of outstation cheques, payments, facility of CMS and RTGS etc.
4. INVENTORY MANAGEMENT:
To study the Inventory management of MIL regarding its valuation model, tools and
techniques used to measure effectiveness of inventory, system of sourcing etc.
5. FINANCING OF WORKING CAPITAL:
To study the financing of working capital, its components and other short term
sources of funding.
LIMITATIONS
1. Insufficiency of Data
2. Shortage of time is also reason for incomprehensiveness.
3. Less cooperation from mill staff.
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RESEARCH METHODOLOGY
Research design:
The research design is a pattern or an outline of research project working. It is a
statement of only essential elements of study, those that provide basic guidelines
for the details of the project. The present study is being conducted followed by
Descriptive Research Design.
Data Collection:
Primary as well as secondary data is used for the project. The research vehicle for
primary data collection is unstructured interview with the managers to get
information regarding all variables for working capital management.
Secondary data is collected from Annual Report, relevant files & records of
Nahar Industrial Enterprise Ltd.
Analysis of Data:
The information gathered are the policies & practices regarding management of the
working capital. Analysis is done in terms of theoretical concepts. Analysis of
working capital performance is done with the help of percentages by showing
graphs, ratios etc.
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REVIEW OF LITERATURE
Introduction of Working Capital Management
Introduction
The developing economies are generally faced with the problem of insufficient
utilization of resources available to them. CAPITIAL is the scarcest productive in
such economies and proper utilization of this resource promote the rate of growth,
cuts down the cost of production and above all beefs up the efficiency of
productive system in any developed policy of such economies financial
management in such field of study that encompasses the detailed analysis of accept
of capital and its management.
Financial management can be divided into two broad area of responsibility as the
management of long-term capital and management of short funds or working
capital. The management of working capital, which constitutes a major area of
decision making for financial manager, is a continuing function, which involves
the control of low financial resources circulating in the enterprise in one form or
the other. It also refers to the management of current assets and current liability.
Efficient management of working capital is an essential pre-requisite for the
successful operation of a business enterprise and improving its rate of return on
capital invested in short term assets. In simple words working capital refers to that
part of the firm’s capital, which is required for financing short term needs of the
company. These funds keep revolving and are being constantly into cash. Hence it
is also known as revolving or circulating capital or short- term capital.
Management of working capital in a given enterprise has profitability and liquidity
implications. Working capital represented by current assets constitutes a document
and controllable segment of investment particularly in manufacturing enterprise
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effort to prune it or optimize its size must promptly enhance the profitability
besides ensuring saving on avoidable outlays. These efforts would simultaneously
active the flow of funds through the enterprise by focusing attention on stranglers
such as dormant inventories and overdue outstanding and by curbing the long
established tendency of funds to stagnate at different stages in the enterprise
operations. Thus working capital offers a common front for profitability and
liquidity management.
Importance of working capital can further be judge from the fact the many a times
the main cause of the failure of business enterprise has been found to be the
shortage of current assets and their mishandling.
A business enterprise may be conceived as a continuous “Stock-to-flow-to-stock”
cycle, where each turn of the cycle is expected to add to the real stock of the
enterprise. Given a certain value of stock at the start of the period, the operations of
the company during the period are supposed to bring net positive flows into the
firm. If this not realized then stock tends to be eroded, a major component in
financial management of an enterprise. Working capital is popular name for such
flow of management.
The standard definition of working capital is:
Gross Working capital: - All the assets include cash and balance.
Net Working capital: - All the current assets, including cash and bank balance
minus all current liabilities.
Implication of gross working capital
Working capital is that it is prime facie indictors of cash realizable by the firm at a
given date (excluding cash and bank balance)
Implication of net working capital
Net working capital shows potential realizable cash after meeting cash obligations
on account of current liabilities.
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KINDS OF WORKING CAPITAL
Working capital may be classified into two ways:
On the basis of concepts
On the basis of time
On the basis of concepts working capital is classified as Gross working capital &
Net working capital. On the basis of time working capital is classified as
permanent or fixed working capital & temporary or variable working capital.
Gross Working Capital:
It represents the amount of funds invested in current assets. Thus, working capital
is the capital invested in the total current assets of the gross. Current assets are
those assets which in the ordinary course of business can be converted into cash
within a short period of normally one accounting year.
KINDS OF WORKING CAPITAL
BASIS: CONCEPT BASIS:TIME
GROSS WORKING CAPITAL
NET WORKING CAPITAL
PERMANENT WORKING CAPITAL
TEMPORARYWORKINGCAPITAL
REGULARW. CAPITAL
RESERVEDW. CAPITAL
SEASONALW. CAPITAL
SPECIALW. CAPITAL
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Gross working capital of OWM in F.Y. 2006-2007:-
Current Assets Rs. Lacs
Inventories 11483.13
Sundry Debtors 4908.57
Cash & Bank Balance 556.22
Other Current Assets 30.80
Loans & Advances 3011.71
Total 19990.43
Gross Working Capital = Current Assets
Therefore, Gross working Capital of OWM = Rs. 19990.43 (Lacs)
Net Working Capital:
It is the excess of current assets over current liabilities. Net working capital may
be positive or negative. When the current assets exceed the current liabilities the
working capital is positive & the negative working capital results when the
current liabilities are more than the current assets. Current liabilities are those
liabilities which are intended to be paid in the ordinary course of business within
the short period of normally one accounting year out of the current assets or the
income of the business.
Net working capital of OWM, Ludhiana in F.Y. 2006-2007 is:
Current Assets Rs. Lacs Current Liabilities &
Provisions
Rs. Lacs
Inventories 11483.13 Sundry Creditors 7333.45
Sundry Debtors 4908.57 Other Liabilities 1567.22
Cash & Bank 556.22 Interest accrued but not 1.14
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Balances due
Other Current Assets 30.80 Provisions 0
Loans & Advances 3011.71 Working Capital Loan 11088.62
Total 19990.43 Total 19990.43
Net working capital is = Current Assets - Current Liabilities
Therefore, Net Working Capital Of the unit= Rs.19990.43 –8901.81 = Rs. 11088.62 Lacs
Permanent or Fixed working capital:
It is the minimum amount which is required to ensure effective utilization of fixed
facilities & for maintaining the circulation of current assets. There is always a
minimum level of current assets which is continuously required by the enterprise to
carry out its normal business operations. For example, every firm has to maintain a
minimum level of raw-material, work-in-process, finished goods & cash balance.
The minimum level of current assets is called fixed or permanent working capital as
this part of working capital is permanently blocked in current assets. As the
business grows, the requirement of permanent working capital also increases due to
the increase in current assets. The minimum amount of capital varies from
organization to organization. The permanent working capital can further be
classified as regular working capital and reserve working capital.
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Regular Working Capital:
It is the minimum amount of working capital required to ensure circulation of current
assets.
Reserve Working Capital:
It is the excess amount over the requirement for regular working capital, which may
be provided for contingencies that may arise at unstated periods such as strikes, rise in
price etc.
OWM is having a steady production cycle of about 1.5 months which is the regular working
capital. OWM has an open policy for stocking of wool. Its management determines the wool
holding period on regular basis depending upon the wool conditions, its prices, cost-benefit
analysis of storage cost and other factors.
It hardly showed any requirement of reserve working capital and its production has been
stable during the period under study.
Temporary or Variable working capital:
It is that amount of working capital which is required to meet the seasonal
demand & some special exigencies. Variable working capital can further be
classified as seasonal working capital & special working capital. Most of the
enterprises have to provide additional working capital to meet seasonal & special
needs. The capital required to meet the seasonal needs of the enterprise is called
seasonal working capital. Special working capital is that part of working capital
which is required to meet the special exigencies such as launching of extensive
marketing campaigns for conducting research etc.
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Seasonal Working Capital:
It is the capital required to meet the seasonal needs of the enterprise.
OWM, as said earlier, procures WOOL (its basic raw material) which is a seasonal crop and is
imported mainly from Australia. So it needs to store the wool stocks for around six months in
its peak season. Its working capital limits are assessed on the basis of three months’ stock.
And the remaining is financed by taking a short term loan from its consortium banks.
Special Working Capital:
It is required to meet special exigencies such as launching of extensive marketing
campaigns for conducting research etc.
In OWM permanent working capital is fixed while the temporary fluctuates. But permanent
working capital can also be increased with the passage of time when need arises while
temporary working capital can be increases or decreases.
NEEDS OF WORKING CAPITAL
The need of working capital arises due to time gap between production and realization
of cash from sales. There is an operating cycle involved in the sales and realization of
cash. Thus it is needed for following purposes:
1. For the purchase of raw materials, components and spares.
2. To pay wages and salaries.
3. To incur day to day expense and overhead cost.
4. To meet the selling costs.
5. To provide credit facilities to customers.
6. To maintain the inventories.
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Excess or inadequate working capital
Every business concern should have adequate working capital to run its business
operations. It should have neither redundant or excess working capital nor
inadequate nor shortage of working capital. Both excess as well as short working
capital positions are bad for any business. However, out of the two, it is the
inadequacy of working capital which is more dangerous from the point of view of
the firm.
Disadvantages of excessive working capital
1. Excessive working capital means idle funds which earn no profits for the
business & hence the business earns a proper rate of return on its investments.
2. When there is a redundant working capital, it may lead to unnecessary
purchasing & accumulation of inventories causing more chances of theft,
waste & losses.
3. Excessive working capital implies excessive debtors & defective credit policy,
which may cause higher incidence of bad debts.
4. It may result into overall inefficiency in the organization.
5. When there is excessive working capital, relations with banks & other
financial institutions may not be maintained.
6. Due to low rate of return on investments, the value of shares may also fall.
7. The redundant working capital gives rise to speculative transactions.
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Disadvantages of inadequate working capital
1. A concern, which has inadequate working capital, cannot pay its short term
liabilities in time. Thus, it will lose its reputation & shall not be able to get
good credit facilities.
2. It cannot buy its requirement in bulk & cannot avail of discounts, etc.
3. It becomes difficult for the firm to exploit favorable market conditions &
undertake profitable projects due to lack of working capital.
4. The firm cannot pay day-to-day expenses of its operations & it creates
inefficiencies, increases costs & reduces the profits of the business.
5. It becomes impossible to utilize the fixed assets due to non-availability of
liquid funds.
6. The rate of return on investments also falls with the shortage of working
capital.
DETERMINANTS OF WORKING CAPITAL
1. Nature and size of business.
Working capital requirement of a firm are basically influenced by nature of its
business. Trading and financial firms have a very small investment in fixed assets, but
require a large sum of money to be invested in working capital. In contrast, public
utilities have a very limited need of working capital because they provide services on
cash basis. Hence no funds will be tied up in debtors and stocks. Working capital
needs of most manufacturing concerns fall between two extremes. The size of
business also has an important impact on its working capital needs. Size may be
measured in terms of scale of operations. A big firm will need more working capital
than a small firm will.
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The size of the OWM is large enough and generates about 32308 Lacs of sales in 2006-07. It
has undertaken expansion projects which call for increase in requirements of working capital.
That is the reason by expansion of 4352 worsted spindles and 432 semi worsted spindles,
opening up of new showrooms, its assessed working capital limits (Funds Based) have gone up.
2. Manufacturing cycle
The manufacturing cycle comprises of purchase and use of raw materials and the
production of finished goods. Longer the manufacturing cycle, larger will be the
firm’s working capital requirements.
Since OWM is a fully integrated plant with using cotton as a raw material and producing
Denim Fabrics and Jeans wear, AND using wool as a raw material and producing sweaters
knitted tops etc. as finished product its manufacturing cycle is longer. Moreover, being raw
material i.e. cotton and wool are a seasonal products, Raw material cycle understandably
needs to be larger keeping in view the storage requirements of about 6-8 months stock in its
peak season.
3. Sales growth
The working capital need of a firm increases as the sale grows. It is difficult to
precisely determine the relationship between the volume of sales and working capital
needs. As sales grow, the firm needs to invest more in inventories and debtors. These
needs become very frequent and fast when sales grow continuously.
The firm’s sales are growing in the past few years which require increased need of working
capital. It has nearly by 33.33% from 2005-06 to 2006-07 i.e. Rs. 32308 lacs from Rs. 24737
lacs. OWM is in expansionary phase and its working capital limits (fund based) have
increased to Rs. 88 crores and non fund based working capital limits have increased to 80
crores.
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4. Price level change
Generally, rising prices will require a firm to maintain higher amount of working
capital. However, companies, which can immediately revise their product prices with
rising price levels, will not face a severe working capital problem. Effect of rising
prices will be different for different companies. Some will face no working capital
problem, while working capital problems of other may be aggravated.
Increase in cotton costs and other manufacturing inputs has obviously increase the working
capital needs of OWM. The cotton cost has gone from avg. Rs. 44/- per kg to Rs. 55/- per kg
thereby resulting increase by about 25% in raw material costs and the prices of wool have also
increased by 4% as compaired to base year.
5. Operating efficiency and performance
The operating efficiency of a firm relates to the optimum utilization of resources at
minimum cost. Better utilization of resources improves profitability and thus helps in
releasing the pressure on working capital. Firms differ in their capacity to generate
profit from business operations. Some firms enjoy a dominant position due to quality
product or good marketing management or monopoly in the market and earn a high
profit margin and vice-versa can be there. A high net profit margin contributes
towards working capital pool.
Since OWM is operating at about 86% capacity utilization, it has been able to reduce its
unutilized capacity and thereby increasing its production which reduces its operating cycle.
6. Market condition
The degree of competition prevailing in the market place has an important bearing on
working capital needs. When competition is keen, a large inventory of finished goods
is required to promptly meet the needs of customers. Also lenient terms of credit are
to be given to attract the customers.
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Since OWM sells its denim fabrics, sweaters, pullovers and other finished goods only on cash
basis, and it sells yarn at a credit period of 45-60 days, the debtors collection period is very
minimal. Major chunk of cash sales reduces its working capital cycle.
7. Production policy
In certain industries the demand is subject to wide fluctuations due to seasonal
variations. The requirements of working capital, in such cases, depend upon the
production policy. The production could be kept either steady by accumulating
inventories during slack periods with a view to meet high demand during the peak
season or the production could be curtailed during the slack season and increased
during peak season. If the policy is to keep production steady by accumulating
inventories it will require higher working capital.
OWM keeps normally SIX TO EIGHT month of productions raw material in stock and it
keeps one month’s stock in process and thereby keeping its production cycle to about 1.5
months.
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A) INDUSTRY PROFILE
Textile Industry Overview
It has been rightly said that 21st Century will belong to Asia. This is getting clearer
and holds good even in case of Textile Sector. It is well known that with very high
labor costs in U.S.A and Europe, entire activity from spinning to garmenting will
shift to Asian countries like China, India, Bangladesh, Pakistan, and Sri Lanka etc.
With the abolition of Quota Regime, each country would try to grab maximum
share of world trade in textile and garment sector. Indian Textile Industry will have
to face fierce competition particularly from China, Pakistan, Bangladesh and Sri
Lanka. It is now very clear that China will secure much larger share vis-à-vis other
competing countries and India will have to settle down to a second position.
If you look at the global clothing scenario, where the textile market stands today is
worth more than $400 billion and it is still growing every year. As a result, the
recent globalization of the textile trade has opened up highly demanding and
evolving requirements for outsourcing in textiles.
Recent studies have highlighted that fabric weaving alone expends around 28
million tons of fiber every year. This figure is parallel to more than half of the
global textile market. It is predicted that global production will grow by 25%
between 2002 and 2010, to reach more than 35 million tons and Asia is one of the
key regions for growth.
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Textile industry in India
The textile industry occupies a unique place in our country. One of the earliest to
come into existence in India, it accounts for 14% of the total Industrial production,
contributes to nearly 30% of the total exports and is the second largest employment
generator after agriculture. Although the development of textile sector was earlier
taking place in terms of general policies, in recognition of the importance of this
sector, for the first time a separate Policy Statement was made in 1985 in regard to
development of textile sector.
India's share in world's textile trade from the current 4% to 8% by 2010 and to
achieve export value of US $ 50 billion by 2010 Vision 2010 for textiles envisages
growth in Indian textile economy from the current US $ 37 billion to $ 85 billion
by 2010; creation of 12 million new jobs in the textile sector. Because India has
natural advantages which can be capitalized on strong raw material base - cotton,
man-made fibers, jute, silk; large production capacity (spinning - 21% of world
capacity and weaving - 33% of world capacity but of low technology)
It has a unique position as a self-reliant industry, from the production of raw
materials to the delivery of finished products. It is a major contribution to the
country's economy. Its vast potential for creation of employment opportunities in
the agricultural, industrial organized and decentralized sectors & rural and urban
areas.
A few important facts about India’s textile industry:
The textile industry is the single largest foreign exchange earner for India.
Currently it accounts for about 8 % of GDP, 20 % of the industrial production and
over 30 % of export earnings of India.
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It has only 2-3 % import intensity. About 38 million people are gainfully employed
with the industry making it the second largest employment providing sector after
agriculture. Textiles, alone, account for about 25 percent of India's total for
earnings. The industry is concentrated in Tirupur (Tamilnadu) and Ludhiana
(Punjab). Tirupur produces 60 percent of the country's total knitwear exports.
Knitted garments account for almost 32 percent of all exported garments. India's
textile industry since its beginning continues to be predominantly cotton based
with about 65 percent of fabric consumption in the country being accounted for by
cotton. India can envisage its textile sector becoming $100b industry by 2010. This
will include exports of $50b.
India: One-Stop Solution to Textiles Sourcing
Second largest producer of textile and man-made fiber/yarn.
Second largest produce of Jute contribution 65% to the world.
Second largest produce of silk contribution 19% of the world.
Third largest produce of cotton fiber accounting for15% to the world.
Third largest produce of cotton fabric.
Fifth largest produce of cotton fabric/yarn.
Contributes 23% of the world spindles.
Ministry of finance has added 165 new textile products under duty drawback
schedule. The new products included wool tops, cotton yarn, acrylic yarn, viscose
yarn, various blended yarn/fabrics, fishing nets etc.
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ORGANISATION PROFILE
A) Review of literature on the organization
AN INTRODUCTION
THE NAHAR GROUP
"At Nahar,excellence is always an ongoing journey
never destination"
The Nahar Group- one of the leading business groups of India came into
existence in 1949 with the initial efforts of three Oswal brothers, Sh. Vidya Sager
Oswal, Sh. Lachman Dass, and Sh. Rattan Chand Oswal. They started a hosiery
factory to manufacture socks only. It was a dynamism vision- hard work,
farsightedness, and co-cooperativeness of Sh. Vidya Sager Oswal that small
factory in the days of II World War bagged a contract from Military.
This was the zoom-up point for the Oswal brothers. On 23 rd June, 1949 the
Oswal hosiery factory spitted into
Oswal Woolen Mills, and
Oswal Spinning and Weaving Mills Ltd.
Sh. Vidya Sager Oswal and Sh Rattan Chand Oswal manage the OWM and
Sh. Lachman Dass headed OS&WM Ltd.
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The initial capacity was 800 spindles. Sh. Vidya Sager Oswal gave a mission
to the company; it was to target three basic needs of Mankind- Food, Cloth and
Shelter, & it was a single minded pursuit of excellence relentless sprit of the
enterprise Nahar group has archived heights of success.
In 1956, the spindle capacity was increased to 2000 and in 1960, a hosiery
unit was attached to OWML and in 1965, the spinning capacity was raised to
12000 a distant memory as the Nahar Group surges ahead to establish itself as a
reputed industrial conglomerate with a wide range portfolio- cotton and woolen
yarns fabric processing, hosiery garments, knitwear sweaters, steel, soaps, sugar,
infrastructure development, information technology.
In the year 1960 the hosiery branch was also attached to OWM. By 1966 the
export market was trapped and during this process Russia was targeted.
It was in 1972 that Mr. Vidya Sagar Oswal’s vision again came into foreplay
when he concentrates on Backward Integration of the spinning and hosiery unit of
OWM. So a wool combing unit was set up. On the other hand of ROTI part of the
mission four solvent extraction unit two in Ludhiana and two in Madras were set
up.
But unfortunately in 1978 the Darbar brand of vanaspati started incurring losses
due to the inequitable policies of govt. to favor SSI’S in this sector. So these
Vanaspati plants and refineries were closed.
The dyeing plant in-housing laboratories etc were also rerouted to make
OWM a composite unit. And at present OWM has a spindle base capacity of
26,248 spindles with other related facilities in house.
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Today they step into the new millennium, those nascent days of 800 spindles
stand up become a distant memory as the Nahar group surged ahead to establish
itself as a reputed and respectful industry conglomerate with a wide ranging
portfolio spinning, knitting, fabrics, processing textile, hosiery, garments knitwear,
infrastructure and information technology. The group include following industrial
company.
Though in many areas Group has achieved market leadership but because of
tough competition it is pulled back to refocus, restructure and realign its corporate
blue –print to establish a new and appropriate equation with the new market forces.
It encompass aspiration and consolidates brand equity for the domestic markets
regarding the first groups aggressive and market survey forays have helped, zoom
the export senses contributing to over one third of the present turnover of the
group.
Focusing the second market driven brand extensions pervading to their high
profile and top-line, “Monte Carlo” has met with resounding success “Canterbury”
another brand too is not far behind. Both are associated with the woolen Sweaters
and Jerseys.
Today with the brand extension on their mind “brand equity” as a game plan,
the group board based its range to introduce Monte Carlo cotton garment for Indian
market. To widen the project portfolio the group has recently put two project
spinning unit and denim fabric. The plant will manufacture super fine quality for
inland consumption as well as for export to other country with latest art of
technology in the world.
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In the year the turn over of reach to a new peak at 1800 crore in the year
1999-2000 with a foreign exchange (of Rs 600 crore in it).the group continued
excellence in the export has been recognized by the government as well as the
export council of India and rewarded by several trophies, awards and certifications
by them.
Woolmark Certification on Monte Carlo Products .
Business Super brand Affiliation of Monte Carlo .
More Achievements
Monte Carlo and OWM yarns were exhibited as best products at
INTERNATIONAL WOOL SECTRRIAT in INDIA. It has been rated as best in
woolens and fashion.
From 1995 to 1999 ‘Best Exhibited Product’ by the Wool mark Company
for ‘Monte Carlo’ woolens.
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NAHAR GROUP OF COMPANIES
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Oswal Woolen Mills Ltd
NAHAR SPINNING MILLS LTD.
NAHAR EXPORTS
NAHAR FIBRES LTD.
NAHAR FABRICS LTD.
OSWAL COTTON MILLS LTD.
NAHAR INTERNATIONAL LTD.
NAHAR IND ENTERPRISES LTD.
NAHAR IND INFRASTRUCTURE LTD
NAHAR SUGAR AND ALLIED IND LTD
OSWAL WOOLLEN MILLS LTD.
Established in1949, the company is manufacturing all type of blended worsted
yarn, weaving yarns, blankets, Lois ,shawls etc. it also has a facility of wool
combing, low to top converter, acrylic woolen and polyester dyeing and vegetable
oils .The company is proud to have highly popular ,bounded products of knit wear
MONTE CARLO AND CANTERBURY. Company has a turnover of Rs. 225 cr.
The main operations of the company are at Ludhiana. The OWM Ltd. Is a flagship
company of Nahar group OWM LTD. is a name of reckon with, both in the
domestic and international markets research and today the company boasts North
India’s most sophisticated laboratory approved by the INERNATIONAL WOOL
SECRETARIAT (IWS) and is authorized to act as a quality checking center for
other manufactures.
OSWAL COTTON MILLS LTD.
The company was add to group’s fleet in October 1989 .It is also an ISO9001
certification holder company manufacturing 100% acrylic, mélange, industrial and
100% EOU unit .Company has a capacity of 55000 spindles. The company’s total
turnover is Rs. 120 crores including exports of Rs.15 crores.
NAHAR SPINNING MILLS LTD .
Established in December 1980, the company is now as ISO 9002 certificate holder
company .it is engaged in manufacturing of all type of cotton, acrylic and blended
yarns, as well as knitted fabrics and garments. The company has spindle age
34
capacity of 66200 spindles including 100% EOU and a full-fledged dyeing unit.
The company’s turnover is around Rs. 398 crores including exports of over Rs. 190
crores.
NAHAR EXPORTER LTD .
Established in November 1988, the company is also an ISO 9002 certification
holder with manufacturing of 100% cotton and polyester cotton yarns. The
company’s turnover is Rs. 246.77 crores including of exports of Rs. 217.13 crores.
Company also has 100% EOU / cotton yarns. The company’s turnover is Rs.
246.77 crores including of exports of Rs. 217.13 crores. Company also has 100%
EOU.
NAHAR FIBER LTD.
The company was added to group’s fleet in October 1989 .It also an ISO 9002
certification holder company manufacturing 100% acrylic, and 100% cotton yarns.
Company has also 100% EOU unit. Company has a capacity of 55000 spindles.
The company’s total turnover is 174.20 crores including exports of Rs. 45.31
crores.
NAHAR INTERNATIONAL LTD .
The company was incorporated in June 1990. The company has Electric Ace
Furnace manufacturing capacity of 100000MT p.a. and a steel rolling capacity of
85000MT p.a. The company is manufacture of round, square and flat stainless
steel. In its spinning capacity unit, it is producing regular and high bulk acrylic
cotton yarn in dyed grey forms. It has its full –fledged dyeing unit. Spindles age
capacity is about 100000 spindles. Company is also having 100% EOU .The
35
company’s turnover is Rs. 322.03 crores including of exports turnover of Rs.
18.18crores. Works of the company are located at Ludhiana. Bhiwani and near
Chandigarh at Lalru.
NAHAR INDUSTRIAL ENTERPRISES LTD.
This company was incorporated in September 1983 and is manufacturing Edible
oils, Toilet soap, fatty acid, citric acid. Glycerin Oxygen gas and solvent. Extracted
Rice oil and Vanaspati. The company is also engaged in manufacturing of 100%
EOU. Company has spindle capacity of about 25000 spindles. The works of the
company are located at Village Jalaldineal near Raikot and at Lalru near
Chandigarh in Punjab and other operations are near at Ludhiana.
NAHAR SUGAR & ALLIED INDUSTRIES LTD .
The company was incorporated in February 1993. Mr. Kamal Oswal heads it.
Moreover, are manufacturing white crystal Sugar, molasses, and baggage? The
company’s turnover is Rs. 48.62 crores. The works of the company is located at
Amloh near Khanna in Punjab and other operations are at Ludhiana.
GROWTH CHART- FEATURES
1. Total number of units 9.
2. Group turnover is Rs. 2254 crore in 2007.
3. Export Market: U.S.A., United Kingdom, Germany, Russia, Japan,
Australia, New Zealand, Holland, Thailand, Hong Kong, Singapore, Taiwan, South
Africa, Canada, Egypt, Israel and Bangladesh.
4. No strike/accident situation and near zero staff turnover.
36
5. Important brand names are “MONTE CARLO” and CANTERBURRY”
OWM were the proud recipient of the “Best exhibited Products” award from the
international wool Secretariat for these two glamour’s brands.
6. Product portfolio: Spinning, knitting, fabrics processing, hosiery garments,
knitwear, sugar, infrastructure development and information technology
7. COTTON COUNTY is there emerging ready to wear Brand.
8. Beyond their professional portfolio lies the human group that has always
been deeply enriched in social upliftment at every level like
Jawahar Lal Oswal public charitable Trust
Mohan Dai Oswal Memorial Hospital
GROWTH CHART- ACHIEVEMENTS
The group has also achieved excellence in exports which has also been recognized
by the export council as well as the govt. of India by bestowing several export
rewards and trophies such as:
1. First gold trophy in global exports in 1989.
2. First silver trophy in hosiery exports in1990
3. Export award consecutively for five years (1989 to 1994) for exports of
woolen hosiery garments.
4. International award for excellence performance in exports in 1993.
5. Silver trophy for 2nd highest export performance in 1998 -1999.
6. ISO 9002 received in 2001.
7. NAHAR EXPORTS LIMITED, is the recipient of Best Exporter for the
year 2002-03
8. Also NIEL, GARMENT UNIT is the recipient of State Level Safety Award.
9. Exports to high Quality conscious countries like USA, UK, Germany,
Russia, Japan, Australia, New Zealand, Holland, and many more.
37
10. They have successful launched a world-renowned famous brand “MONTE
CARLO” & “CANTERBURY” in the sector of T-Shirts, Thermals and Cotton
collection.
Due to its excellent export performance the company continues to enjoy the status
of “GOLDEN TRADING HOUSE”. The export performance has also enabled
the company to win two trophies for non quota category and the second one
SILVER TROPHY for highest export of cotton yarn in non quota category.
B) COMPANY PROFILE
i ) Review of Literature
At OWM, Even the Word
“Impossible”
Says
“I’m Possible.”
The founder of this organization was Lala Vidya Sager Oswal who has
brought the entire empire of Oswal. He started his life as a Home-maid servant, he
even used to give physical aid to his employer, and his salary was Rs.18 in 1924.
He was dynamic and was having the quality of Farsightedness.
38
He wanted to achieve something in his life so with the initial efforts of he
himself and his brothers Sh Lachman Dass Oswal and Sh. Rattan Chand Oswal, he
started a hosiery factory to manufacture socks only. It was his hard work that his
small Oswal hosiery factory in the days of II World War bagged a contract from
Military.
This was the zoom-up point for the Oswal brothers. On 23 rd June, 1949 the
Oswal hosiery factory spitted into Oswal Woollen Mills, and Oswal Spinning and
Weaving Mills Ltd.
Sh. Vidya Sager Oswal and Sh Rattan Chand Oswal manage the OWM and
Sh. Lachman Dass headed OS&WM Ltd. By the time of Jawaharlal Lal, the
present day owner of OWML, the group has already done five splits. It was in
1993 that after year of infighting Mr. Jawaharlal Lal Oswal split up form his father
Mr. Vidya Sager Oswal taking with him the group’s choices companies OWML,
Oswal Fats and Oils, Punjab Comcast, Nahar Fibers and Nahar Exports.
This was called Nahar Group, which at present constitutes nine companies
viz. OWML, Nahar Spinning, Nahar Export, Nahar sugar, Nahar Industry
Enterprises Ltd, Nahar International, Nahar Fibers, Nahar Ind. Infrastructure, and
Nahar Fabrics and is headed by Mr. J.L Oswal. Today the turnover is more than Rs
2250 Crores.
39
SEASON’S
There are mainly two seasons viz.,
PEAK SEASON: - June to December.
LEAN SEASON: - January to March.
ii) Historical Analysis
HISTORY OF OWM
From 1949 when small hosiery factory was incorporated into a Public Limited
Company, to the present day, constant upward growth has symbolized the charter
of a company called Oswal Woolen Mills Limited. From starting out with 800
spindles to 17200 spindles today, from simple hosiery items to high value – added
items like designer knitwear, from a turnover of Rs. 165 laces in 1965 to Rs. 181
crores in the year ended 31.3.2000 – all these are no mean achievements, and what
made them possible in so short a time is nothing but a miracle that combined
brilliant market insight with diversification.
As the company progressively increased spindlage to 2000 in the year 1960,
it had already established a market for itself in the areas of hosiery knitwear &
textile fabrics like blankets and shawls etc. Very soon, it became the first Indian
exporter of woolen garments to Russia and shortly after in 1972, the company set
up its OWM Wool combing Unit – the first of several backward integration
measures. Soon began the in – house processing for the Woolen Division. With
increasing capacity & demand for its products, Oswal Woolen Mills Limited soon
became a name to reckon with, both in the domestic & international markets.
Research & Development also received focused attention & today the Company
40
boasts of North India’s most sophisticated laboratory, approved by the
international wool Secretariat (IWS)& is even authorized to act as a Quality
Checking center for other manufacturers.
Today OWM is the flagship company of the glorious Nahar Empire and a
proud owner of widely loved Super Brand in Knitwear, Monte Carlo and
Recognized Super Brand Canterbury. The product range include diverse types of
Woollen, Acrylic and Synthetic Blended Yarns, Lambs Wool Yarn, Woollen
Viscose & Acrylic Tops, Textile Fabric, Woollen Knitwear, Hosiery & Cotton
Garments.
Recently an ultra modern Lambs wool & Angora Spinning plant has been set
up, of which more than 50% manufacturer is for captive consumption. The balance
meets the requirements of other hosiery knitwear exporters in India. Further a
modernization cum balancing program has been introduced to upgrade its capacity
for manufacturing garments & fabrics for various Government & Defense
departments. In woollen hosiery segment, company start the operations with
import of raw greasy wool mostly from Australia and our products include various
types of specialty yarns, such as, worsted woollen yarn, lamb wool yarn, acrylic
yarn, various types of wool based blended yarn, fancy yarn, hand knitting yarn and
knitted and hosiery garments etc. company subsequently added cotton garments to
our existing product portfolio during Fiscal 2002, which we outsource as per our
requirements and sell under our own brand name. Since March 2006, we have
started manufacture of indigo dyed specialty denim fabric, which has added to our
existing vast range of product portfolios. Currently, we are employing over 4,500
persons and our present manufacturing. Facilities include 26,248 spindles to
manufacture worsted woollen yarn besides machines for weaving, knitting, dyeing
and finishing. Presently, our manufacturing facilities are producing approximately
41
2.5 million lbs of wool tops per annum, 750,000 pieces of readymade knitted
garments per annum and 10 million meters of denim fabric per annum.
We are the registered owners of well-known trade name ‘Monte Carlo’ for
selling our woollen hosiery and cotton garments. ‘Monte Carlo’ has been
recognized as a ‘Super brand’ for woollen hosiery garments since Fiscal 2003 by
International Society for Super brands. Our distribution channel comprises of a
mix of ‘Monte Carlo Exclusive Brand Outlets’, network of national chain stores
and multi brand outlets. Today, Oswal Woolen Mills Limited is a company that
owes its strength in the market & financial solidity to the foresight of its Chairman,
Jawahar Lal Oswal, the professional inputs of the Board of Directors and able them
of Managers. A closely knit team that keep close to them a formula of tremendous
success.
iii) Management Structure
LIST OF BOARD OF DIRECTORS
Mr. Jawahar Lal Oswal Chairman-Cum-Managing Director
Mr. Amarjeet Singh Director
Mr. Dinesh Oswal Director
Mr. Kamal Oswal Director
Mr. Sandeep Jain Executive Director
Mr. Dinesh Gogna Executive Director
Dr. (Mrs.) H.K. Bal Additional Director
42
Mr. O.P. Sahni Additional Director
Mr. K.S. Maini Additional Director
Dr. Suresh Kumar Singla Additional Director
A team of highly qualified, experienced, and professional managers from
various fields assists the Board of Director; Mr. J.L.Oswal is the Chairman-Cum-
Managing Director of the company. He is the B.Com Hon’s, belongs to illustrious
Oswal family, and has inherited high business sense from his ancestors. Other
directors also are well-experienced persons with high business sense.
Unfortunately, despite of their global ethos, the group is still not convinced about
the needs to professional .The management of its companies, strategic planning,
strategic central and treasury management is still in the hands of the family.
Although the group is building a professional team to take them in to next century,
much of the transformation is seen only at Fier-2 of the management.
43
iv) Brands
THE WORLD OF
MONTE CARLO & CANTERBURY
KNITWEARS
MONTE CARLO
(It’s the way you make me feel)
There is no other place that is exclusive and a trend-setter like Monte Carlo,
situated on the Rivera, 18 Kilometers E.N.E of France.
There you can see the latest in Fashion Courtesy of the rich and famous. You will
find the same class and luxury in our Scottish Lamb’s and Australian Merino
Wool.
To ensure an exquisite degree of softness, the wool, which comes from
pedigree Australian Lambs, and Sheeps, is selected and when placed in the hands
of European designers, this exclusive quality wool is transformed into a collector’s
item called Monte Carlo.
44
CANTERBURY
(Soft and sensual woolen wear)
It is whisper lite yet incredibly warm goes into it is appealing exclusive cash wool
and skilled fingers weave the yarn into exquisite shapes and patterns, thus
breathing life into designer dreams. Canterbury garment is a promise of warmth
and fascination forever.
C) PRODUCT PROFILE
PRODUCT PROFILE OF OWM: -
A. Wool / acrylic top
B. Yarns
i. Weaving yarns
ii. Hand knitting yarns
iii. Hosiery yarns
C. Textile fabrics
i. Blankets
ii. Scarf’s
iii. Gents Lohis
iv. Woolen shirting (only for defence)
v. Shawl
45
vi. Woolen suiting
D. Hosiery knitwear productsi. Lady cardigans
ii. Pullovers
MONTE CARLO and CANTERBURY are popular brands of international
quality are segments of OWM’s product.
The various types of yarns given below are produced in the range of NE 10 to 40
for application in knitting & weaving. Single and TEO double in the Grey form.
YARNS
A) Cotton yarns
100% cotton yarn – both carded & combed.
Blended yarn- Acrylic/Cotton, Cotton/Viscose and Cotton/Acrylic.
Mélange yarn-Polyester/Cotton, Cotton/Viscose and Cotton/Acrylic.
100% Acrylic yarn- Both from wet and dry spun acrylic fibers.
Industrial yarn-Type Cord and Carpet TFO multifold ply.
B) Worsted Yarns
Woolen –woolen, woolen, and Acrylic blends
C) Dyed Yarns
They are also manufacturing dyed yarns. Fiber dyed and yarn dyed cotton Acrylic /Cotton and Polyester/Cotton
46
D) Fancy Yarns
Manufactures of various types of fancy yarn on SAURFR ALLMA
FABRIC
Grey dyed-100% cotton and polyester/cotton
Knitted and Weaving
Rib Jacquard, Fleece, P.K. sheering, Velour, Single jersey and sinker
Plain-woven twills, Drills, Satin, Poplin, and Mats
GARMENTS A) Woolen
Under woolen they are manufactures of renowned “MONTE CARLO” and “CANTERBURY” range of woolen knitwear i.e. Pullovers, lady cardigans and all types of woolen garments.
B) Cotton
Shirts, t-shirts for internationally known brands like GAP, REEBOK, KOSUGI, SUN MARINO, MIZUNO, CARDIN and CHESTER FIELD MFG CORP. (CMC)
They are also producing Woolen/Acrylic Blankets, men’s Lohis &shawls.
STEEL
Alloys, Round and Stainless Steel, Round, Square and Flats.
VEGETABLES
47
Edible oils, Soaps, Fatty Acid, Glycerin, Oxygen Gas, Solvent Extracted Rice Bran Oil. & Vanaspati.
EXPORT MARKETS
Argentina, Brazil, China, Columbia, Chile, Czech Republic, Israel, Lebanon,
Lithuania, Poland, Portugal, Peru, Turkey.
Competitors and Market Analysis
MAJOR COMPETITORS OF OWM
Woolen products
The textile and apparel industry is highly competitive. No single company
dominates the industry. OWM seek to compete in the domestic and export markets
on the basis of the price, range, quality of their products, delivery times and
customer service capacities. In the woollen hosiery garments range, which is sold
under brand ‘Monte Carlo’ they do not have any significant competition and enjoy
brand loyalty from their customers.
Major competitors in pullovers and cardigans
o CASABLANCA
o PRINGLE (SCOTLAND)
Competitors of woolen/blended worsted yarn business
Vardhman Textiles Limited
Jayshree Textiles Limited
Malwa Cotton Mills Limited
Cotton Garment
48
As regards their branded woven garments primarily cotton shirts and
trousers, they are new entrant in already highly competitive market. They face
competition from many established domestic as well as international brands.
However, the woven cotton textile industry is highly competitive
and no single company dominates the industry. They seek to compete in the
domestic market on the basis of the price, range, and quality of our products, brand
name and our delivery times.
Competitors of their Denim Fabric
Arvind Mills Limited , Aarvee Denims Limited, Raymond Limited.
vii) S.W.O.T Analysis
Strengths of the company
1. (Farsightedness of the chairman MR. Jawahar Lal Oswal)
2. Extensive Experience of our Promoters
3. Good brand equity
4. Many persons are working here for more than 50 yrs. This shows commitment
of employees towards their org.
5. Strong dealer network, mutual relations with them.
6. Good training programs by OWM for their employees.
7. Member of wool mark and ISO 9002
8. Automated machines of latest technology
9. Exclusive designs, good texture and fabrics.
10.Premium range of pullovers manufactured by them which no other co.
produces.
11.Research and Development department
49
12.Laboratories for testing the quality of the product
13.Exports rising every year
14.Imported yarn from ITALY for premium range
15.The Landed Properties in Gurgaon and Chennai
16.Quality Standards
17.Cost control
Weakness of the company
1. Lack of professionalism
2. Long hierarchy
3. Structure of departments is not fully professional
4. OWM is dependent upon foreign producers for greasy wool.
5. Depend on the third party for sale and the distribution of the product.
6. Expanding the ‘Monte Carlo’ product range to make it an ‘All Season Brand’.
Any inability in repositioning the brand may adversely affect our business.
7. Operating in a highly competitive and fragmented industry.
8. Operations are subject to a variety of environmental laws and regulations
including those covering hazardous materials.
9. Risks relating to the price volatility in the import of wool.
10.Risks in relation to outsourcing of cotton segment of the Monte Carlo Products
11.Poor after sales services
Internal Risk Factors
50
1. Dependent upon foreign producers for greasy wool. Any interruption in the
supply of quality
2. Import all wool requirements, mainly from producers in Australia and New
Zealand. In addition also import wool from producers in South Africa and a
minor portion from United States of America.
3. Depend on third parties for significant elements of sales and distribution efforts.
4. Expanding ‘Monte Carlo’ product range to make it an ‘All Season Brand’
which is very risky.
5. The success of business is substantially dependent on retaining the services of
key management
6. Personnel and attracting talented professionals. The loss of the services of any
of these persons may adversely affect our business and results of operations.
7. If the number of multi brand outlets and national chain stores continue to
increase or consolidate, Business could be negatively affected
8. Face risks in relation to outsourcing of cotton segment of the Monte Carlo
Products.
9. High working capital requirements.
OPPURTUNITIES
1. With booming retail sector and big players like WALMART, BHARTI entering into that field, OWM is also stepping ahead with a mission of opening up of 150 retail outlets all over India under a brand name MONTE CARLO.
2. Fabrication for various companies likes NIKE, MARKS AND SPENCER, GAP, WILLS, etc.
3. Manufacturing of kids garments
4. Best quality goods, can quote for best selling price
51
5. Expanding the business in Finance sector
6. Oswal can always liquidate stock pressure by slight reduction in prices
7. As brand image is very good and production base is too wide, Oswal can have good and large amount of customers with whom direct business can be established, but with little bit of difficulty as the Oswal will have to better the quantity and regularity of sales
THREATS
1. Mushrooming and upcoming of small hosieries in Ludhiana
2. Seasonal demand for their major product i.e. pullovers
52
53
ANALYSIS OF WORKING CAPITAL FROM DIFFERENT
ASPECTS
1. COMMON SIZE STATEMENT OF THE UNIT
(Rs. Lacs)
Particulars 2007 %age 2006 %age
Current Assets:
Inventories 11483.13 57.4 9450.95 62.60Sundry Debtors 4908.57 24.6 4145.89 27.5Cash & Bank balance 556.21 2.8 101.61 .67Loan & Advances 3011.71 15.06 1404.81 9.3OTHER Current Assets 30.8 .15 0
19990.43 100.00 15103.29 100.00
Current Liabilities:
Creditors 7333.45 49.5 5448.32 47.65Other Liabilities 1567.22 10.57 979.67 8.6Accrued expenses 1.14 .007 1.4 0.012Provisions and loans 5920 39.94 4903.91 42.9Total Current Liabilities
14821.8 100.00 11433.30 100.00
Thus we see from the common size statement that main components of current assets
are Inventories and Loans & advances. The share of inventories in 2006 was 62.60%
but now it decreased to 57.4% in 2007, which shows large sum of money has been
blocked in inventories. And 76 % of the Loans and advances comprise of Advances
made to directors of the company and 20.13% represents advance income tax paid.
Current liabilities on other hand majorly comprise of creditors. The share of
creditors in total current liabilities was 47.65% in 2006 which has increased to
49.5% in 2006.
2. SCHEDULE OF CHANGES IN WORKING CAPITAL
54
PARTICULARS 2007 2006Increase/Decrease(in Rs.)
Increase/Decrease
(in %)
Current assets
Inventories 11483.13 9450.95 2032.18 21.5%
Sundry debtors 4908.57 4145.89 762.68 18.4%
Cash & Bank 556.21 101.61 454.6 447.39%
Loan & Advances 3011.71 1404.81 1602.9 114%
Other Current Assets 30.8 0 30.8 -
Total Current Assets (A) 19990.43 15103.29 4887.14 32.3
5
Creditors 7333.45 5448.32 1885.13 34.6%
Other liabilities 1567.22 979.67 587.55 59.97%
Accrued expenses 1.14 1.4 (.26) (18.57%)
Provisions 5920 4903.91 1016.09 20.71%
Total Current Liabilities
(B)
14821.8 11433.30 3388.5 29.64%
Working Capital
(A-B)
5168.63 3669.99 1498.64 40.5%
(Rs.Lacs)
Thus we see from the above table that the inventory has increased by 21.5% in 2007
from 2006. And further we know that, as discussed earlier, major portion of total
inventory is comprise of raw materials. The main factor of having large raw material
inventory was that the wool has to be imported from Australia. The company has done
cost-benefit analysis regarding storage cost etc. The cash and bank balances have
increased by 447% in 2007 from 2006. The main reason for such a sharp increase was
due to opening up of new showrooms where sales are done on cash basis and increase
in fixed deposits which they give for security purpose to banks. The creditors have
55
increased by 34.6 in 2007 from 2006 mainly due to sharp increase in amount
outstanding to S.S.I Undertakings.The Provisions and loans have increased by 20.71%
in 2007 from 2006, resulting in the net working capital of Rs 5168.63 lacs, an
increase by a meager 40.5% from the previous year.
3. WORKING CAPITAL (Rs. In ‘00000)
Particular 2007 2006 2005Total current assets
19990.43 15103.29 16793
Total current liability
14821.8 11433.30 12115
Net working capital
5168.63 3669.99 4678
56
It is clear from the above graph that net working capital of OWM is increasing
consistently over the period of 2003-05 but it has decreased for the period 2005-06
and again in 2006-07 it has shown an increase.. It is because of the expansion plans of
the company. Still the company is in their expansionary phases which will results into
more working capital in the coming years.
1. OPERATING CYCLE ANALYSIS
In order to understand the length of time which reports are committed to various components of
working capital, operating cycle analysis has been done. The operating cycle of a firm begins with
the acquisition of raw material and ends with the collection of receivable. There are four aspects of
operating cycle, which involves commitment of resources, a material stage, and accounts finished
stage.
But here in OWM, the operating cycle involves the period of conversion of raw material into
work in process; work in process into finished goods and finished goods into sale. As OWM’s
policy is to sell on cash basis, they hardly have any Accounts receivables IN FINISHED
GOOD, but OWM sells yarn at 45-60 days credit period. And also, they have to purchase the
raw material i.e. wool on credit l/c basis for a period of 180 days from the international
market, so there is large amount of Accounts payable.
OPERATING CYCLE OF OWM
Operating Cycle 2003 2004 2005 2006 2007
Raw Material Conversion Period
37.60 44.88 52.68 117.07 183.85
Work in Progress Conversion Period 11.17 13.19 16.04 13.09 13.83Finished Goods Conversion Period 20.87 32.26 42.74 24.13 30.18
Operating Cycle 69.64 90.33 111.46 154.30 227.86
57
The operating cycle of OWM is increasing year by year, as it is clear from the above table. It is
important to note here is that it is the raw material conversion period which has increased
almost 5 folds from 2003 to 2007, forcing the overall operating cycle of OWM to increase.
As it is said earlier, the company has to store around 6 months of raw material i.e. WOOL,
since it’s a seasonal crop, in its peak season for steady production run throughout the year.
The company has a steady production cycle ranging from 1 month to 1.5 months throughout
this period.
2. RATIO ANALYSIS
A ratio is an arithmetical relationship between two figures. Financial ratio analysis is a
study of ratios between various items or group of items in financial statement,
turnover ratios have been used for analysis. Ratio analysis is the powerful tool of
financial analysis of accounting data. The relationship of the figures should be
meaningful. Financial analysis & ratio is used as an index or yardstick for measuring
performance of the firm.
Working capital is that part of total capital which is important in current assets, to get
better insights about the working capital position of the OWM, it is better to utilize
ratio analysis. To analyze the working capital position I shall here interpret the
following ratios of OWM for 2 consecutive financial years 2005-06 and 2006-07.
1. Liquidity Ratio
a) Current ratio
b) Quick ratio
2. Activity Ratios
a) Current asset turnover ratio
b) Working capital turnover ratio
3. Inventory turnover ratio
58
4. Inventory to working capital ratio
1. LIQUIDITY RATIOS : The liquidity aspect is essential for both the creditors as well
as management of a business enterprise. These ratios are used to judge a firm’s ability
to meet short term obligations. From them much insight can be obtained to present
cash solvency of the firm and its ability to remain solvent in the event of adversities.
We wish to compare short-term obligations with the short-term sources available to
meet these obligations.
a) Current ratio: - The current ratio is very popular financial ratio measure as the ability
of the firm to meet current liabilities. Current assets are converted into cash for the
payment of current liabilities. Apparently higher the current ratio the greater the short
term solvency, Current ratio of MIL can be shown as under: -
Current Assets_ _
Current Liabilities
Table showing the Current Ratio
(Rs Lacs)
Particulars 2007 2006
Current assets 19990.43 15103.29
Current Liabilities 14821.8 11433.30
Current ratio 1.35 1.32
59
A current ratio of 1.33:1 is generally considered satisfactory. The current ratio of the
unit is much in line with the recommended and it ensures the payment of dues in time.
b) Quick ratio: - Although current ratio is a valuable indicator of liquidity yet it may
lead to misleading conclusion, in case of inventories forms a major component of
current assets, the quick ratio is a fairly stringent measure of liquidity. It is based on
those
Current assets which are the highly liquid or which are easily converted into cash.
Inventories and prepaid expenses are excluded from this category, because these are
the best liquid component of and has the ability to pay its current liabilities in time
when these are due, the ratio may be expressed as:-
Liquid assets
Current liabilities
Table showing the Quick ratio
(Rs. Lacs)
Particulars 2007 2006
Quick assets 8507.3 5652.34
Current Liabilities 14821.8 11433.3
Quick ratio 0.57 0.49
The rule of thumb for quick ratio is 1:1. The ratio of the company is much less than
this. It shows risk on part of creditors to get the return. The ratio is falling
considerably. It is because of the fact that a large portion of current assets comprise of
inventories, a not so liquid asset.
60
2. ACTIVITY RATIOS : The funds of creditors and owner are invested in various kinds
of assets to generate sales and profits. Activity ratios measure how efficiently the firm
employs the assets. These ratios are based on the relationship between the level of
activity, represented by sales and level of various assets. The important turnover ratios
are:
a) Current assets turnover ratio: The idea of the current assets turnover is to ascertain
the contribution of the current assets to sales. The relationship indicates efficiency or
otherwise of the utilization of current assets to attain the maximum sales. It is a
relative measure as it is compared with previous year. Lower ratio tells us that the
company is employing more current assets for a given level of sales and vice-versa,
the ratio may be expressed as:-
Sales
Current Assets
Table showing current assets turnover ratio
(Rs. Lacs)
Particulars 2007 2006
Sales 32308.31 24737.58Current assets 19990.43 15103.30
Turnover ratio 1.62 1.64
Thus current assets are contributing 1.62 times to sales in 2007 as compared to 1.64
in 2005, which shows the firm adopts the policy of high current assets.
b) Working capital turnover ratio: Net working capital turnover
ratio indicates the velocity of the utilization of working capital. A higher ratio
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indicates the effective utilization of working capital and a low ratio indicates
otherwise, the ratio may be expressed as on the following page:-
Sales
Net Working Capital
In the OWM, working capital turnover ratio can be made through following table: -
Table showing working capital
(Rs. Lacs)
Particulars 2007 2006
Sales 32308.31 24737.58
Net working capital 3693.63 3669.99
Working capital turnover ratio 8.75 6.74
The above table shows that the net working capital turnover ratio of the unit is
increasing which means better utilization of funds by the company this year than the
previous year.
3. Inventory turnover ratio is calculated earlier in operating cycle.
4. Inventory to working capital ratio: It may be defined as the relationship between
inventory and working capital. Here working capital is taken as Net working capital.
Inventory to working capital ratio:
Inventory
Working capital
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Table showing inventory to working capital ratio
(Rs. Lacs)
Particulars 2007 2006
Inventories 11483.13 9450.95
Working capital 3693.63 3669.99
Inventory to working capital ratio 3.11 2.58
The Above table shows that with the increase in Inventories as compares to year 2006,
there is increase in working capital too. As the ratio is more than 1:1, this implies that
there is insufficient working capital available to finance inventories.
3. INVENTORY MANAGEMENT
Inventories form a link between production and sales of a product. Inventories
consisting of raw materials, work-in-progress, and finished goods represent a
significant portion of total assets. 50-60% of the total current assets in Oswal Woollen
Mills Limited (OWM) are constituted by inventories. Because of the substantial
investment in inventory, the inventory management of the firm is highly crucial for
the successful management of its working capital.
Finished goods inventories are completely manufactured products that are ready for
sale. Stock of raw materials, work in progress facilitates production, while stock of
finished goods is required for smooth marketing operations. Thus, inventories serve as
a link between the production and consumption of goods. The levels of three of these
inventories depend upon the nature of the business. A manufacturing firm will have
substantially high level of all the three kinds of inventories.
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Textile companies like OWM having seasonal raw material i.e. Sheep wool, imported
largely from Australia, so has to store large amount of it. On the other hand,
inventories of consumer Product Company will not be large because of short
production cycle and fast turnover.
A fourth kind of inventory, company also maintains is Stores and spares. It include
office and plant cleaning materials, oil, fuel, light bulb and the like. These materials
do not directly enter production but are necessary for production process.
Usually, these Stores and spares are small part of the total inventory and do not
involve significant investment. Therefore, a sophisticated system of inventory control
may be maintained for them. The advantages of increased inventory are several but it
has a side i.e. a large amount of funds might be blocked in inventory and would also
require holding, handling charges, and other risks which the finance manager has to
look into, are price fluctuations and consumer rates. In dynamic industries the finance
manager also must take the threat of obsolescence into consideration.
Inventories should be increased as long as resulting savings exceed the total cost of
holding the additional inventory. This balance requires coordination between
production, marketing and finance areas of them.
VALUATION OF INVENTORY
The value of material has a direct bearing on the income of a concern, so it is
necessary that a method of pricing materials should be such that it gives a realistic
value of stock.
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There are various methods which are followed by financial management for the
valuation of raw material like FIFO, LIFO, average price method, weighted average
method, standard price method, market price method.
In OWM Ludhiana, they use the Weighted Average Method for valuation and pricing of
inventory. They use the software INGRESS whereby all the data is fed online which generates
monthly consumption report and stock valuation.
TOOLS & TECHNIQUES OF INVENTORY MANAGEMENT
A proper inventory control not only helps in solving the acute problem of liquidity but
also increase profits and causes substantial reduction in the working capital of
concern.
Various tools and techniques are present in financial management like A.B.C.
analysis, VED analysis, just in time, Lead time, etc. for measuring the effectiveness of
inventory.
OWM uses empirical analysis mode as inventory analysis technique. OWM does not do its
production on the basis of demand i.e. they produce on continued basis. So they store inventory on
the basis of annul requirements i.e. they are very well conversant with the level of inventory to be
stored for the given level of production.
BUFFER STOCK
As OWM Ludhiana does its production on the base of regular basis i.e. operating
production so, they maintain its buffer stock at a higher level.
PURCHASES RELATED TO INVENTORY
OWM Ludhiana purchases most of its chemical from Sandows, BSF, ICI etc in the
domestic market and imports from Wonderful Company of China. This chemical is in
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the liquid and as well as in solid forms. Most of the imports are through Letters of
Credits and so their payments periods are pre-determined.
OWM LTD Ludhiana purchases more than 65% wool from Australia and rest 35%
from South Africa, Russia, Argentina and United States Of America etc. MIL has
storage areas in its own warehouse facilities in the unit itself.
It sources its raw material inventory through its own in house operations which work
regularly on this activity which helps in saving a lot of money and time.
Cotton is the other component which is used as a raw material. OWM sources its
cotton requirements from within Punjab as well as outside Punjab from Haryana and
Rajasthan etc. depending upon the requirements of fabric quality.
All the sourcing is made through material dept which is located at OWM head office
in Ludhiana.
SYSTEM OF SOURCING
1. First, the user raises the indent.
2. Then, that Indent is sent to the stores dept.
3. Stores dept. checks the item in inventory, if available, then provides and maintains the
re-order level and sends the requisition to purchase.
4. Purchase dept. sources it after costing and getting quotations from different suppliers.
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CASH MANAGEMENT
Cash management is related to the inflows and outflows of the cash of firm, cash
balance held by the firm, receipt and payment system of firm, cash budget, cash
forecasting techniques.
RECEIPT SYSTEM
1. The firm uses CMS (Cash Management Service) offered by its bankers for collections
within the country.
2. Firm has its tie-up with two banks for its collections. These banks are HDFC, and
ICICI BANK.
3. HDFC AND ICICI does not charge any charges for this service from OWM Ludhiana.
4. Due to credit of outstation cheques in two or three days clearing, it reduces its
financial cost significantly.
The customers also feel easy to make advance payments through CMS facility as they
have to arrange for the payment at their site only instead of sending it to head office of
OWM.
OWM has online internet banking of the following banks:
a) State Bank of Patiala
b) HDFC
c) ICICI
With availability of online internet banking, it can efficiently monitor its cash flow
and without much dependence on banks.
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PAYMENT SYSTEM
a) OWM Ludhiana has a multi city cheque book system for its payment system. It has
at par facility for all out station creditors. Creditors are also happy to get prompt
credit of payments done by OWM. With at par facility cheques for all outstation
payments, better rates are negotiated with the suppliers.
b) With the Real Time Gross Settlement (RTGS), payment system has further
facilitated. RTGS facility is now being offered by almost all the member banks like:
(1) State Bank of Patiala (SBop)
(2) Allahabad Bank
(3) HDFC
(4) ICICI
Allahabad bank offers RTGS facility free of charge whereas SBOP charges only upto
upper cap of Rs. 25/- per transaction. With RTGS, funds are electronically transferred
by one bank to another bank (irrespective of its location in India) on the very same
day.
OWM is required to make payments to various raw material suppliers which are not
covered under at par locations. Since SBop has branches at such remote areas. RTGS
is used to make payments where the supplier gets the credit on same day.
CASH BUDGET AND CASH FORECASTING TECHNIQUES
a) OWM Ludhiana prepares its cash budget on yearly basis.
b) Firm’s forecasting techniques are based upon its experience and previous budget.
c) Daily cash flow report is also maintained in the firm.
d) At least 15 lacs floating cash is maintained in the firm for daily transactions.
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FINANCING OF WORKING CAPITAL
After a firm has decided upon the level of working capital to be maintained it has to
decide the mode of financing. Financing of working capital:
The sources of finance and form of credit
a) Trade credit
b) Bank credit
c) Current provision of non bank short term borrowings
d) Long term sources comprising equity capital and long term borrowings
At OWM Ludhiana there is primarily two sources for financing of working capital
a) Bank credit (including working capital loan), and
b) Long term sources comprising shareholders fund and long term
borrowings.
The first source i.e. Bank credit represent the Working Capital Loan given by
bank to OWM Ludhiana and also has an overdraft arrangement with its banks so
that it can withdraw up to a specified amount of money according to its requirements.
OWM has formed a consortium of four banks for financing its working capital
requirements viz.
1 Allahabad Bank, (Leader) (A Bank)
2 State Bank of Patiala (SBOP), (B Bank)
3 Punjab and Sind Bank (P&S) (C Bank)
4 Punjab National Bank (PNB) (D Bank)
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Presently Company is availing following working capital facilities from the
consortium –
(Rs. in crores)
Particulars Allahabad
Bank
SBOP P&S PNB Total
Funds Based 52.80 26.40 8.80 0.00 88.00
Total Funds Based 52.80 26.40 8.80 00.00 88.00
Non Funds Based 48.00 24.00 8.00 00.00 80.00
Total Non Funds Based 48.00 24.00 8.00 00.00 80.00
Term Loans 12.21 113.24 00.00 11.80 137.25
Total W.C. Limits 113.01 163.64 16.80 11.80 305.25
Moreover, it raises ad-hoc short term loans for meeting its cotton stock and yarn
requirements from banks.
Secondly, OWM Ludhiana also finances its working capital requirement from Long
term sources comprising shareholders fund and long term borrowin
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SUGGESTIONS
1. OWM should finance a major portion of its requirement of working capital through
short term sources of finance as they are cheaper than the long term sources. It
is financing a part of its working capital from long term sources of finance as it
is clear from the fixed assets to total long term fund ratio.
2. The Company is not adopting proper inventory systems like A.B.C. analysis,
V.E.D. analysis etc. this inventory system can make the inventory management
more result oriented. Since, inventory covers the major potion of OWM’s
current assets; it should be given prime attention.
3. The company should do proper Cost-to-Benefit analysis before purchasing the raw
material i.e. wool for following months in light of its storage cost, current
prices, estimated future prices, further demand etc. along with the opportunity
cost of holding such inventory.
4. The short term liquidity of the firm is not satisfactory as it is clear from the quick
ratio which is 0.26 for 2007. The company should take immediate steps towards its
improvement.
5. The surplus fund of the unit should be invested in some short marketable securities,
rather than providing it to its subsidiary free of cost, to improve profitability
along with liquidity.
6. The company should reduce its Production cycle to decrease its working capital
requirement. It can be done by reducing finished goods conversion period. As
OWM does its production on the job basis, it should not be difficult for the
company to reduce this.
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CONCLUSION
OWM has opted for a moderate overall working capital policy. This suggests that it is
risk averse. It wants a reasonable profit with a reasonable amount of risk. If it goes in
for an aggressive policy the profits generated could be high but accompanied with the
high level of profits will come high level of risk, which they feel is not appropriate.
Since with this policy the profits being generated are substantially high a change in
the working capital policy is not called for.
On analyzing the operating cycle it has been found that the operating cycle has
increased by approx. 48% as that of previous year. The operating cycle can be
reduced to a greater degree by trying to get a reduction in the raw material conversion
period.
Since OWM produces only on orders therefore the inventory requirements for the
following months can be accurately forecasted. Since, the raw material i.e. cotton and
wool are a seasonal crop, it should be stored for following months by analyzing the
benefit of storing it, the storage cost associated with it, wool prices, its availability and
also further requirements of the company as per its orders. Every month if forecast is
made accordingly and order is placed, it would help in bringing down the time
required in the raw material storage period.
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Bibliography
www.google.com www.yahoo.com Finacial Management , I.M. Pandey
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