overview of indian tyre industry

7/31/2019 Overview of Indian Tyre Industry

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EXECUTIVE SUMMARY

JK TYRE has emerged as one of the leading tyre manufacturers in the country. The company has

been able to spread its presence in the most remote parts of the country as well, with the help of

some 4000 odd dealers spread throughout the length and breadth of the country. The level of

economic activity, performance of domestic automotive industry, and the fairing of the transport

sector directly influence the performance of tyre industry in India. While changes have become the

norm in passenger car segment, in the bus and truck tyre segment, its acceptance is still limited.

Bus and truck tyre changes could emerge in the long term as the quality of roads improves and the

restrictions on over loading are better enforced.

The company follows a centralized approach when it come down to the planning aspects of the

company, the major strategies of the company are decided at the head office of the company and

from there communicated to the plants situated in Rajasthan, Karnataka and Madhya Pradesh.

Another important aspect for the company is that it being a manufacturer the working capital is an

area that calls for intensive and careful introspection year on year. Hence WORKING CAPITAL

MANAGEMENT becomes a very important part of operations for the company.

The company being mostly dependent on the working capital facilities, it is maintaining very good

relationship with their banks and their working capital management is well balanced. Controlling

working capital requirement is done by the company by way of optimization of working capitalcycle and maximizing credit to creditors and minimizing credit of customers by best utilization of

resources and minimizing stock level

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INTRODUCTION

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Despite these challenges, according to CARE Research, while the industry may register a tonnage

growth of only 4.27% in FY09, the long term prospective seems to be bright. They expect the

industry to experience a CAGR of approximately 8.21% between FY08 to FY13. Automotive

companies have started experiencing increasing sales and raw material prices are stabilizing which

will boost tyre sales over the coming months. However, experts suggest there will be some time

lag before profitability picks up as tyre manufacturers are still carrying high cost inventories.

India Vs Global

The global tyre market currently is estimated at USD 70 billion while the Indian market is around

Rs. 100 million. The global market is dominated by Goodyear-Sumitomo with a share of 22%. On

the other hand, the domestic industry is dominated by MRF Ltd. Several mergers and acquisitions

have characterized the global market, in the recent past. This is essentially to acquire technology,gain wider access to markets and be competitive. Indian players are also reengineering their

businesses and looking at strategic tie-ups in this segment.

In terms of technology, radial tyre usage has been catching up at a quick pace in the global market.

Almost all the automobile segments have shifted to radial tyres and the usage of cross ply is

restricted to trucks and buses only. On the other hand, in the domestic market, the radial tyres are

being used only in the passenger car segment while the rest of them still stick to the cross ply

variety. This is because of the lower price of cross ply and its re-tradability. In addition, the poor

quality of roads in India restricts the use of such tyres.

Pricing Scenario

Pricing is influenced by the demand. Since the tyre demand has not significantly increased in the

last one year, many of the tyre companies have surplus stocks. Hence in the last 2-3 months the

tyre companies are offering discounts between 20 to 40 percent to car manufacturers, but the car

companies are trying to squeeze more discounts. The cheap imports of non-radial tyres from China

are also adding to the present woos of these tyre manufacturers.

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EXIM Scenario

The export market for India has been predominantly to the USA that accounts for nearly 30% ofexports from the country. These are mostly of the cross ply variety. However, of late Indias share

in the US market is being threatened by China and Japan. These two countries are able to offer

prices that are lower than that offered by Indian manufacturers. In addition, these two nations are

logistically better placed than India when it comes to exporting to the USA.

Domestic tyre manufacturers are also facing threat from imports from China and South Korea. The

landed cost of tyres from China is lower than the Indian price by 30%. In addition, tyres from

South Korea are imported at 30% customs duty while from other countries the duty levied is 35%.

Thus in both cases the domestic tyre manufacturers are feeling the heat.

Government Policies

The recent budget policy of the government has also not brought much relief to the tyre

manufacturers. The major issues of concern are high import duty on raw materials, ban on import

of used tyres, lack of exemption in import duty for steel and polyester tyre cords (currently being

imported) and imports of tyres from South Korea at lower duty.

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ATMA (Automotive Tyre Manufacturing Industry)

Automotive Tyre Manufacturers Association (ATMA) was set up in 1975, registered under The

Companies Act, as the representative body of automotive tyre industry in India. 8 large tyrecompanies representing over 90% of production of tyres in the country are members of the

Association.

The Association with the guidance of the Managing Committee functions through various

committees set up, consisting of different disciplines, such as, Marketing, Export, Purchase (Raw

Material), Taxation, Technical etc. Day to day functioning of the Association is managed by the

Secretariat of the Association headed by the Director General.

The primary function of the Association is to be a conduit between Government Departments and

the tyre companies in having two way communications. The Association projects the views of theindustry on various subjects to respective Government departments. Conversely, the expectations

of the Government from tyre industry are conveyed to tyre companies. Further, the Association

briefs its members of the changes in Government Policy on issues related to Indian economy and

industry in general and tyre industry in particular. Frequent meetings are held with the

Government to sort out problems being faced by the industry.

The Association also has an extensive information bank on the tyre industry which is available for

tapping not only for Government but those who are interested in tyre industry related

developments.

The Association regularly publishes data on production and export of various categories of tyres.

Besides, the Association prepares Status notes on various subjects which are of relevance to tyre

industry, such as, Tyre Retreading Industry, Regional Trade Agreements & Rules of Origin, Anti

Dumping, etc.

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FINANCIAL YEAR

Financial Year 2009-2010 (Est.)

Turnover of Indian Tyre Industry Rs. 25,000 Crores

Tyre Production (Tonnage) 13.50 lakh M.T.

Tyre Production All Categories (Nos.) 971 Lakh

Tyre Export from India (Value) : Rs. 3000 (est) crores

Number of tyre companies: 36

Industry Concentration 10 Large tyre companies account for over 95%

of total tyre production.

Radialisation Level - Current

(as a % of total tyre production)

Passenger Car tyres: 98%

Light Commercial Vehicles: 18%

Heavy Vehicles ( Truck & Bus ): 12%

Government Policy

Tyre Industry De licensed since 1987

Export (of tyres and tubes) Freely allowed

Import (of new tyres and tubes) Freely allowed.

Import Policy for Used / Retreaded tyres: Restricted from April, 2006

Source: www.atma.com

COMPANY PROFILE

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YEAR EVENTS

1951 The company was incorporated as a private limited company in West Bengal in 14th

February, 1951. Until 31st March 1970, the company was engaged in themanaging agency business. Thereafter, the company decided to undertake

manufacturing activities and obtained a letter of intent in February 1972 for the

manufacture of automobile tyres and tubes.

The letter of intent was converted into an industrial license in February 1974 for the

manufacture of 4 lakh nos. each automobile tyre and tubes per annum. The

company was converted into a public limited company on 1st April 1974. The

manufacturing project was promoted by Straw Products Ltd and J.K. Synthetics

Ltd.

The co. entered into technical collaboration with General Tire International Co.,

U.S.A., (a subsidiary of General Tire &Rubber Co., U.S.A.) for technical services

for a period of 5years and sales agreement for the supply of technical know-how,

engineering and documentation for operational facilities (for a period of 8 years

from 23.8.73).

Under the collaboration agreement, the Company has the right to use on its

products the wording Made in collaboration with General Tire International Co.,

USA.

1982 The company's technical collaboration agreement with General Tire International Co., was

renewed for a further period of 5years.

1987 The overall working resulted in substantial profits despite a 51-days strike as well as go-

slow from 14th October. The strike had since then been resolved and amicable

settlement was reached. Efforts were on to launch a new pattern in steel belted

radial tyres.

1988 New steel radial tyres for Maruti Gypsy and Tata mobile were introduced. The Company

proposed to incur an expenditure of Rs.300 lakhs for installation of latest and

sophisticated R&D equipment.

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1989 Several new patterns and sizes of tyres were introduced including a semi-lug Nylon Truck

tyre, all of which were well received in the market.

1991 Handeep Investment, Ltd., Hidrive Finance Ltd., Panchanan Investment Ltd., and RadialFinance Ltd., J. K. International Ltd., Shivdham Properties Ltd., and J.K. Asia

Pacific, Ltd., are subsidiaries of the Company.

1992 The J.K. International division expanded its activities by opening its office in Moscow

besides starting Company's subsidiaries in U.K. & Honkong. The radial tyres for

tractors and business launched in the previous year were well received.

1993 New radial tyres Brute' and Ùltima' were introduced. The Company was in the process of

developing steel belted radial tyres for the prestigious cars in the Mercedes Benz,

Peugeot, Daewoo race and Opel Astra. A new pattern developed for bus and trucks

`PE-T8' was well received in the market.

1994 The company maintained its pace of growth, despite steep rise in raw material and input

costs and competition. The Company effected an all round cost reduction and

attained higher capacity utilisation at both the tyre plants at Jaykaygram and

Banmore.

The T-rated Ultima tyres launched for new generation cars found its acceptance in

DCM Daewoo's `Ceilo'. Also J.K. Steel radial was chosen for Mercedes Benz

India.

The Company undertook to develop steel radials for GM's Àstra'. PAL's Peugekot'

FIAT's, ÙNO' and M & M's `Ford'.

The Company launched a premium truck tyre `Jet Trak' - 39 which was introduced

to meet the need of the heavy load market. The new tractor rear tyre `SONA' was

well received in the market.

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1996 During this period, a new Car tyre Jet Drive XS, the widest nylon car tyre for Maruti 800

was launched. Along with new semi-lug and heavy duty lug tyre for trucks, a new

lug tyre for super heavy load applications Jet Trak 39 was also introduced.

In the Radial category, Ultima XR Radial, a terrain tyre was introduced. All these

products were well received in the market.

Both the tyre plants operated to full capacity. In line with JK tyre, the radials unit

introduced the dual contact high traction and high performance Aquasonic steel

radial car tyre. The unit also developed India's first and only H-rated ultima Xs'

especially for Mercides - Benz Cars.

2000 The Company proposes to reduce its debt by Rs 125 crore in the current fiscal from the

current level of Rs 635 crore by way of loan repayment.

The Company and Indian Oil Corporation have entered into a marketing alliance

for installing digital air pressure gauges and setting up sales and services outlets at

IOC petrol stations throughout the country.

2001 Raghupati Singhania managing director of J K Industries has been appointed the 19th

Chairman of Automotive Tyre Manufacturers Association, the representative body of

tyre industry in India.

2002 J.K.Industries Ltd has informed BSE that CRISIL has assigned a P1+ rating to the

Commercial Paper program of the company.

2003 J.K. Industries Ltd (JKI) has a new Marketing Director in Mr Ajay Kapila. Before joining

JKI, Mr Kapila was Senior Vice-President (Sales and Marketing) at Kinetic

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Engineering Ltd. He was also Director on board and operational head of Kinetic's

direct selling arm - Kinetic Marketing Services Ltd.

Completes its comprehensive restructuring exercise of businesses that leads to its

emergence as a pure automotive tyre company. Along with the de-merger of its

non-tyre business, Sugar and Agri Seeds, into separate companies namely JK SugarLtd and JK Agri-Genetics Ltd. JKI also completes the merger of Vikrant Tyres Ltd

with itself.

J.K.Industries delists from Jaipur Stock Exchange divested its wholly-owned

subsidiary called J.K. Drugs and Pharmaceuticals Ltd to TEVA Pharmaceuticals of

Israel.

2004 JK Industries Ltd has informed that its securities are delisted from Delhi Stock Exchange

Association Ltd (DSE) w.e.f. January 29, 2004.

2007 JK Industries Ltd has informed that the name of the Company has been changed from J K

Industries Ltd to JK Tyre & Industries Ltd w.e.f. April 02, 2007.

Company name has been changed from JK Industries Ltd to JK Tyre & Industries

Ltd.

2008 The company has issued rights in the ratio of 1:3 at a premium of Rs.75 per Share.

VISION

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To be amongst the most admired companies in India, committed to excellence

MISSION

Be a Customer Obsessed Company - Customer First 24x7

No.1 Tyre Brand in India

Most profitable Tyre Company in India

Motivated and Committed team for excellence in performance

Be a Green Company

Deliver Enhanced Value to all stakeholders

Enhance global presence through Acquisition / JV / Strategic Partnerships.

Core Values

"Excellence comes not from mere words or procedures. It comes from an urge to strive and deliver

the best. A mindset that says, When it is good enough, improve it. It is a way of thinking that

comes only from a power within."

Caring for people.

Integrity including intellectual honesty, openness, fairness & trust.

Commitment to excellence.

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International Operations

JK Tyre is one of the largest tyre exporters from India with a worldwide customer base in over 80

countries across all 6 continents. International sales operate through a strong and dedicated

distribution network fully supported by the company's technical team in terms of continued

product development to meet specific market needs.

Besides India, JK Tyre has enhanced its global foot print with the acquisition of a Mexican tyre

major Tornel in 2008 to further strengthen JK Tyres resolve for increased presence in the

NAFTA trade bloc and emerging economies of Central and South America where it has been

exporting tyres from India in large volumes for over twenty years.

In addition to Mexico, to meet the increasing demand for our reputed tyres in the discerning global

tyre markets, we have entered into sourcing arrangements with tyre companies in China Vietnam

and Sri Lanka for various products including Truck Radial tyres and Bias Truck / Bus and LCV

tyres.

As per the Automotive Tyre Manufacturers Association (ATMA), for the FY 2008-09 (Apr-Mar)

in terms of FOB value JK Tyre accounted for about 22 % of the total tyre exports. We were also

the largest exporter of Truck / Bus tyres from India.

JK Tyre products are marketed under the 'JK Tyre' and 'Vikrant' brands and compete with the best

international players. Our Bias range of products commands a premium price and image across

major bias global markets and conform to international quality certifications such as TS 16949,

'DOT'(USA), 'E' mark (Europe), 'INMETRO (Brazil), 'GCC' (Middle East Gulf), SONCAP

(Nigeria), 'ITS' (Kenya), SNI (Indonesia) etc.

In recognition of JKTILs exports efforts, we have received numerous recognitions and awards by

both the central and state governments besides Indian industry.

JK Tyre and Industries have enhanced their global reach by taking over tornel a renowned

Mexican Tyre Company. Tornel has a widespread network of distributors and sales outlets across

Mexico, which will help to consolidate the marketing position of JK Tyre, already a large exporter

to Central America.

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Accolades

Jan 04, 2010

Hall of Fame- Golden Steering Wheel 2010

Dec 31, 2009

JD Power customer satisfaction study 2009

Dec 24, 2009

JK Tyre- Super Brand 2009-10

Dec 14, 2009

National Energy Conservation Award-2009

Dec 14, 2009

Rajasthan Energy Conservation Award-2009

Dec 10, 2009

CII Water Management Award 2009

Dec 01, 2009

CAPEXIL Top Export Award for the year 2008 - 2009

Nov 20, 2009

CII Energy Management Award 2009

Apr 29, 2009

JK Tyre produces revolutionary Ultra-Large OTR Tyres

Mar 21, 2009

JK Tyre wins the National award for excellence in Cost Management

Feb 27, 2009

Excellence Award For Outstanding Marketing

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PROJECT PROFILE

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OBJECTIVES

Objectives act as compass and provide guidelines for a study; this report on JK

TYRES has an underlying purpose stated as follows-

To study the TYRE Industry for the past three years, this gives a glimpse of

the recent trend in the industry.

To analyze the performance of different JK TYRE using quantitative

techniques, that includes ratio analysis

SWOT analysis of JK TYRES that explains various factors that affect the

TYRE industry. This also reveals the opportunities where TRYE industry can

tap and grow and defend their market share.

Analyzing the working capital requirement for JK TYRE.

Analyzing the best sources of funds for fulfilling the requirements of

working capital management.

Scope

The study of Ratio analysis of the company and its competitor states the positioning of the

company in comparison with its competitors from different aspects.

WORKING CAPITAL MANAGENT is an integral part of any firms short term financial

strategy. Thus the project undertaken intends to study the current policies of WORKING

CAPITAL MANAGENT that are followed by the. The study intends to talk in detail about the

current assets and their importance to the smooth functioning of the . At the same time it also

highlights the necessity of managing the current liabilities.

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METHODOLOGY:

The methodology opted for the project is completely dependent on the type of data being dealt

with and also upon the fact that is being analyzed. The methodology may be different for different

parts of the project depending upon the features being looked into. It is being explained below:

a. The project deals with the comparative Ratio analysis of JK TYRES with its closest competitor

MRF.

b. The next part of the study deals with the working capital management of the company by

making use of financial statement analysis. The data for this is obtained through the secondary

sources. The author has determined the operating and cash conversioncycle for the company

analyzing the financial statements. The project also takes various determinants of working

capital management into consideration and ascertains the impact it has for company.

c. The last part of this study talks about the working capital management, in this case also the

author has gone ahead with some discussions with the officials to understand the financing of

the working capital at JK TYRE, and based upon the findings certain suggestions have been

made regarding what other sources of finance that the company can go in for or which sources

the company should focus on (the ones that are the most profitable for the company).

DATABASES

The Study is based mainly on secondary data, where the information is collectedfrom the different sources. Sources include some of the websites, like jktyre, mrf,

ATMA etc.

Also the Capitaline database was approached for the various financial information

and latest happenings around the tyre industry. Also, some articles and surveys

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shall be summarized for their analysis and observing the trend. A detailed

reference list is attached towards the end of the report.

LITERATURE REVIEW:

1. Padachi talks about how a well designed and well implemented working capital managementcan positively contribute to the creation of a firms value. This paper examines the trends in

working capital management and how it impacts the performance of the firm. The paper examines

the trends in working capital needs and profitability of firms, to identify the reasons for anysignificant differences within the industries. It makes use of return on assets as the dependent

variable, as it is the measure of profitability. This study is based on the investigations carried out

on small manufacturing firms of MAURITIOUS. The relation between working capitalmanagement and corporate profitability is investigated using a sample of 58 small manufacturing

firms, using the data for the period 1998-2003. The author uses regression and the results show

that high investment in inventories and receivables is associated with lower profitability.

The key variables used are as follows:

1. Inventories days 2. Accounts receivables days 3. Accounts payable days

4. Cash conversion cycle

The paper also talks about the previous empirical work that establishes a strong significant

relationship between working capital management and profitability. The research paper alsoestablishes that there is an increasing trend in the short term component of working capital finance.

2. Narasimhan and Murty talks about the RETURN ON CAPAITAL EMPLOYED. This research

paper stresses on the need for many industries to improve their return on capital employed byfocusing on some critical areas such as cost containment, efficiency of working capital and by

lowering the investments in working capital finance.

Apart from the two distinct studies the author has also cited the findings of some other researches,

these researches and their findings proved to be building block for the project. The study

conducted by SMITH (1980) indicated that the working capital management plays a importantrole in the profitability and the value of a firm.

Most of the researches pertaining to the working capital management have been conducted indeveloped countries and only a handful has been carried in INDIA. These are summarized here.

BHAYANI (2004) had conducted a study on the working capital and profitability of the cement

industry and he found out that the profitability is highly influenced by the working capital.

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P.K. CHAKRABORTY (2005) & A.K. MALIK & D.SUR (1998, 1999) had conducted a studyto understand the effect of working capital management and profitability.

As is clear from all the above cited studies no study directly pertaining to the tyre industry and

working capital management has been carried out so with this view the author tries to apply the

above mentioned results in the tyre industry to understand its impact on the tyre industry.

INDUSTRY ANALYSIS

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SWOT ANALISIS

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SWOT ANALYSIS

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STREANGTH

Strong brand image

Very large distribution channel

Large product length and width

Economies of scale due to optimum capacity utilization

Collaboration with vikrant

Strong financial position

WEAKNESS

Less brand awareness

OPPORTUNITIES

Growing middle class population

High growth potential in exports in Europe

THREATS

Entry of new players with newer and better technologies

So many close competitions like MRF, APPOLO, BIRLA etc

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Porter five forces analysis

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Entry Barriers: High

The entry barriers are high for the tyre industry.

It is a highly capital intensive industry. A plant

with an annual capacity of 1.5 million cross-ply

tyres costs between Rs. 4,000 and Rs. 5,000

million. A similar plant producing radial tyres

costs Rs. 8,000 million.

Bargaining Power of the

Suppliers: High

The tyre industry consumes

nearly 50% of the natural

rubber produced in the

country. The price of natural

rubber is controlled by Rubber

Control Board and the

domestic prices of natural

rubber have registered a

significant increase in recent

times.

Bargaining Power of the Buyers:

High

The OEMs have total control over

prices. In fact, the OEMs faced

with declining profitability have

also reduced the number of

component suppliers to make the

supply chain more efficient.

Inter Firm Rivalry: Low

The tyre industry in India is

fairly concentrated, with the

top eight companies

accounting for more than

80% of the total production of

tyres.

Threat of Substitutes: Low but Increasing

During the FY2002, over 1,10,000 passenger car tyres were

imported. This constitutes over 2% of total radial passenger car

tyre production in the country. However, with the reduction of

peak custom duty, the import of tyres is likely to increase.


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COMPANY ANALYSIS

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Ratio analysis

Debt-Equity Ratio

MRF: The ratio ranges between 0.7 and 0.95 in past 3 years. This is a good signfor the company as debt is less than equity.

JK tyres: The D/E ratio is very high about 2.2 to 2.4. This is a negative sign forthe company. The company has to look again their policies so as to bring down

the debts.

The debt to equity ratio of JK TYRES is much more then that of MRF which iseven more than double of MRF. This is because of the high debts of the company.

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FIGURE 1: Debt-equity ratio


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Current Ratio

The current ratio is a financial ratio that measures whether or not a firm hasenough resources to pay its debts over the next 12 months. Here mrf tyres are

proving to be efficient. With high current ratio, it is clear that they are managing

their assets and liabilities better than Jk tyres. Reverse is the case with jk tyres.They have current ratio less than 1 an all the 3 years.

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FIGURE 2: current ratio


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Inventory Ratio

As far as inventories are concerned, jk tyres have more inventory than Mrf. But

since the current ratio is less than 1 for jk tyres, this seems that the entire extrainventory is gathered by loans and other similar ways. Whereas, mrf tyres have

lesser inventory ratio. This may be due to less acquisition of inventory by loans,

etc.

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FIGURE 3: inventory ratio


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Debtors turnover Ratio

This ratio indicates how well debtors are being collected. If debtors are notcollected reasonably in accordance with their terms, company should rethink its

collection policy. If debtors are excessively slow in being converted to cash,

liquidity will be severely affected. . Here mrf tyres are proving to be efficient than

JK Tyres. Jk Tyre is constantly increasing in its collection policy, this will resultin increase in debtors turnover ratio.

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FIGURE 4: Debtor turnover ratio


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Interest Coverage Ratio

The interest coverage ratio is used to determine how easily a company can payinterest expenses on outstanding debt. Here also mrf tyres are winning the round.

With ratio in the range of 4 to 7, this seems to be better than jk tyres whose ratio

is between 1 and 2.

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FIGURE 5: Interest coverage ratio


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RONW (%)

This time jk tyres have shown a better performance no matter once. But here also

mrf tyres is showing great piece of consistency. They are getting better returns ascompared with condition of jk tyres

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FIGURE 6: RONW (%)


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Debtors Velocity (Days)

Debt collection period is the period over which the debtors are collected on an

average basis. It indicates the rapidity or slowness with which the money is

collected from debtors. Here MRF velocity of debtors has increased from 2007 to2009, which shows that it is not good sign for MRF whereas JK Tyre has less

debtors velocity than MRF and therefore they are able to convert their debtors

into cash in less time than MRF.

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FIGURE 7: debtors velocity (days)


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Creditors Velocity (Days)

Credit collection period is the period over which the creditors are paid on an

average basis. It indicates the rapidity or slowness with which the money is being

paid to creditors. Both JK Tyre and MRF, creditors velocity has increased from

2007 to 2009 but JK Tyre shows higher velocity in each year than MRF, which

shows that they are blocking creditors for long time and utilizing that cash in other

current activities.

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FIGURE 8: creditors velocity (days)


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Overall compare

1. MRF:- they have good policies running under there . Keeping the inventory low, they are

managing their debts and liabilities quite brilliantly. Apart from comparatively little bit

inferior in debtors and creditors days comparison, they seem to be working really well in

managing the companys finances

2. JK Tyres:- they are struggling with their policies. With more debts than equity and more

liabilities than assets, they seem to be dealing with loans. Their polity of borrowing funds

seems to be not working and an immediate steps need to be taken. However, debtors and

creditors days comparison is going in favor of them but still they are not able to manage

the finances.

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WORKING CAPITAL MANAGEMENT

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WORKING CAPITAL MANAGEMENT:

Management of a firms short term financing is called working capital management. It involves

striking an appropriate balance between a firm's short-term assets and its short-term liabilities.

Efficient working capital management ensures that the firms operations are not affected due to

lack of working capital and it is able to pay off its short term debts and upcoming expenses.

Working capital has two concepts - gross and net.

Gross working capital includes firms total current assets. Current assets can be defined as cash

and other assets that are expected to be converted into cash or consumed in the production of

goods or rendering of services in the normal course of business.

Net working capital is the difference between current assets and current liabilities. Current

liabilities comprise of all short-term obligations admitted in the normal course of business like

purchase of raw material, stores etc., advances received from customers, services already received

but not paid for and the monetary value of facilities already obtained but not paid for.

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FIGURE 9 WORKING CAPITAL MANAGEMENT


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WORKING CAPITAL CYCLE:

Working capital cycle represents how a firms current assets flow through. In a working capital

cycle, cash goes through many stages. Some forms of current assets are more liquid than others, so

it becomes necessary to study the working capital cycle in order to make sure that there is an

appropriate risk return trade off i.e. liquidity-profitability trade-off.

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Cash

A/C

payabl

e

Raw

material

Finished

goods

Wages

payable

Labo

rReceivables

Selling &

Distribut

ion

FIGURE 10 - WORKINGCAPITALCYCLE


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TYPES OF WORKING CAPITAL:

Permanent and variable working capital

The level of current assets required in the company does not always remain the same. It keeps on

changing from time to time. But there is always a minimum level of current assets that is required

continuously to carry on the operations of the firm. This minimum level of current assets is called

the permanent working capital.

The requirement for working capital over and above permanent working capital changes over time

depending on the level of production, sales, manufacturing and other costs. For instance, extra

inventory is required in peak periods of sale. This extra working capital that keeps on changing

depending on other factors is called variable working capital.

In the figure 10, a firms permanent and temporary working capital is shown. We can see that

permanent working capital is stable over a period of time but the variable working capital is

changing. The permanent working capital can also be increasing or decreasing according to firms

performance.

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Time

Am

ountofworkingcapital

Permanent

Variable

FIGURE 11 PERMANENTANDTEMPORARYWORKINGCAPITAL


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THE IMPORTANCE OF WORKING CAPITAL

MANAGEMENT:

Working capital refers to the resources of the firm that are used to conduct operations. Thus

working capital is a part of the investment by the firm and associated with this is an opportunity

cost i.e. the cost associated with sacrificing the next best alternative. If a department is operating

with more working capital than is necessary, this over-investment represents an unnecessary cost.

From a department's point of view, excess working capital means operating inefficiencies. In

addition, unnecessary working capital increases the amount of the capital charge which

departments are required to meet.

On the contrary, insufficient working capital can also affect the liquidity of the firm adversely e.g.

overtrading.

Overtrading It is a phenomenon when there is insufficient working capital and increased sales,

which results in over-stretching of the financial resources of the business. This is called

overtrading.

Thus good management of working capital is required to generate cash which help improve profits

and reduce risks. But the cost of providing credit to customers and holding stocks can represent a

substantial proportion of a firm's total profits. With shorter debtors cycle and reduced inventory

the business will generate more cash or it will need to borrow less money to fund working capital.

This results in reduced cost of bank interest and additional money to support additional sales

growth or investment. Similarly, longer creditors payment period or an increased credit limit,

helps financing future sales. It also helps improve the liquidity position of the firm.

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FACTORS INFLUENCING WORKING CAPITAL

OF A FIRM:

Volume of Sales As the sales grow the currents assets of a firm also grow, hence the firm

requires a higher working capital.Seasonal / Cyclical Factors Seasonal fluctuations of sales affect the variable working capital of

the firm. Thus during peak season, there is a higher need for working capital.

Technological Developments With better technologies at its disposable a firm can operate

efficiently with less working capital. Hence technological developments reduce the need for

working capital.

Firms Policies Every firm has its own working capital policies. A firm which has an aggressive

collection policy will have lesser amounts blocked in receivables hence would have less working

capital.

Size and activities of the firm Larger firms with many resources of funds need less working

capital as compared to total assets or sales. Also, firms that provide services do not require

inventories. Hence have a lower need of working capital.

Availability of credit If credit is available readily then the firm requires less cash at hand. If

short term resources are not available then the firm needs to maintain larger liquid balances of cash

equivalents.

Attitude towards profits and risk Large amount current assets tend to lower profit. Firms

which are keen on achieving higher profits normally manage liquid assets aggressively and vice-

versa. Conversely, greater working capital lowers overall risk. Hence firms which are risk averse

normally have higher working capital.

FIGURE 12 EFFECTOFWORKINGCAPITALONDEGREEOFRISK

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FIGURE 13 EFFECTOFWORKINGCAPITALONPROFITS/RETURNS

APPROACHES TO WORKING CAPITAL

MANAGEMENT:

The objective of working capital management is to maintain the optimum balance of each of the

working capital components. This would enable the firm to hold some amount of liquid cash at

hand. However, such cash may be "invested" in other assets or in reducing other liabilities.

Working capital management takes place on two levels:

Ratio analysis can be used to monitor overall trends in working capital and to identify areas

requiring closer management.

The individual components of working capital can be effectively managed by using various

techniques and strategies.

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WORKING CAPITAL AT J K TYRE

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WORKING CAPITAL ANALYSIS:

This section analyses the working capital ratios that are obtained from the financial statements of

the Organization. In this section the author intends to calculate various ratios for the Organizationand accordingly talk about how the company fares in that regard in comparison to other companies

from the same market.

OPERATING CYCLE

The need of working capital to run the day to day business activities cannot be overemphasized; all

the firms aim at maximizing the wealth of its shareholders. In its endeavor to do so, a firm should

earn a sufficient return from its operations. Earning a steady amount of profit requires successful

sales activity. The firm has to invest enough funds in current assets for generating sales current

assets are needed because sales dont convert into cash immediately. There is always some

Operating Cycle involved in the conversion of sales in to cash.

Operating Cycle is the time duration required to convert the sales, after the conversion of

resources into inventories, into cash. The operating cycle for a manufacturer like JK TYRE

involves three phases:

Acquisition of resources: such as raw materials, labor, power and fuel etc.

Manufacture of the product: This includes the conversion of raw material into work in progress,

into finished goods.Sale of the product: either for cash or for credit. Credit sales create account receivables for

collection.

The length of the operating period for a firm is the sum of:

1. Inventory conversion period

2. Debtors conversion period

The sum of the above two items is equal to the gross operating cycle, when the value of the

creditors deferral period id subtracted from the gross operating cycle we get the net operating

cycle.

A short cash conversion cycle is a sign of good working capital management. Conversely, a long

cash conversion cycle indicates that capital is tied up while the business waits for customers to

pay.

It is quite possible for a business to have a negative cash conversion cycle, i.e. receiving payment

from customers before it has to pay suppliers. Examples are typically companies which employ

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JUST IN TIME practices such as Dell and companies which buy on extended credit terms and sell

for cash, such as Tesco.

The table below gives a brief summary for the various periods for JK TYRE that helps to find out

the operating cycle for the Organization.

PARTICULARS VALUE(IN DAYS)

Number of days of inventory 38.29

Number of days of receivables 32.23

Number of days of payables 51.79

Gross operating cycle 70.51

Net operating cycle 18.73

Table 1: operating cycle for JK tyres

As the table above shows that the company makes good use of the method of deferral payments by

having a period well in excess of the receivables period. Hence the company can be said to have

adopted the approach of always holding the payments for as long as possible while receiving its

payment at the earliest. But the duration of around 2.5 months of gross operating cycle can be

attributed to the fact that the company follows the approach of buying in bulk, some raw materialsfor tyres, when the prices are low and then using the same for the periods to come, hence this may

be one of the many reason why such operating cycle has been obtained. This large time period is

the potential source of improvement as far as the author is concerned. On the other hand the fact

that the company follows a ad-hoc approach as far as the dealers are concerned also enables it have

a receivables period that is acceptable but if the company decides to give credit to the dealers then

this can be a potential source where the company can look to improve big time.

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FACTORS INFLUENCING WORKING CAPITALOF JK TYRE:

1. Volume of Sales As the sales grow the currents assets of a firm also grow, hence the firm

requires a higher working capital. As is evident from figure no.5 we can see that the turnover is

growing for the company also from the company records we can see that the sales have gone up

over the last decade, hence we can say that the requirements for working capital at JK TYRE has

also risen. This symbolizes the fact the firm must preplan for its current assets in order to continue

with its growth. As it is a growing firm hence JK needs to invest in fixed assets so as to sustain the

growth, this in turn leads to more investments in current assets, hence to be able to sustain this

growth the company needs continuous funding.

2. Seasonal / Cyclical Factors Seasonal fluctuations of sales affect the variable working capital

of the firm. Thus during peak season, there is a higher need for working capital. This condition is

generally not experienced by the company but the cyclical factors like availability of raw materials

does affect the production of the company. Hence these fluctuations also effect the working capital

requirements of the firm.

3. Technological Developments With better technologies at its disposable a firm can operateefficiently with less working capital. Hence technological developments reduce the need for

working capital. JK TYRE in this regard is very well facilitated by its own R&D institute

HASTERI which helps the company to produce niche products and the research also helps with

new initiatives in rubber chemistry, nano technology, testing etc. which helps the company in

reducing the working capital requirements of the firm with constant innovations and being

technologically very advanced.

4. Firms Policies Every firm has its own working capital policies. A firm which has an

aggressive collection policy will have lesser amounts blocked in receivables hence would have less

working capital. With JK TYRE the scene is very much similar as the company follows a ad-hocand approach and generally works on advance basis with the dealer network spread throughout the

country. Hence the receivables are very less, hence this lowers down the working capital

requirements of the company but at the same time it takes away the possibility for the company to

be able to have a greater number of sales by giving out credit

.

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5. Size and activities of the firm Larger firms with many resources of funds need less working

capital as compared to total assets or sales. Also, firms that provide services do not requireinventories. Hence have a lower need of working capital. JK TYRE operations are done on a very

large scale with a annual capacity to manufacture around 9 million tyres per annum the company

requires large amount of funds, but on the same hand makes use of only a limited number of

sources of working capital finance , this adds to the working capital requirements for the firm.

6. Availability of credit If credit is available readily then the firm requires less cash at hand. If

short term resources are not available then the firm needs to maintain larger liquid balances of cash

equivalents. JK TYRE makes use of a facility that is called cash credit on a large extent hence the

company doesnt require large amount of cash in hand which can also be seen from the balance

sheet which clearly shows that the cash in hand for the firm for the year 2007-09 is Rs. 41.99crores, while it was slightly under Rs. 30 crores for the year 2006-07.

7. Attitude towards profits and risk Large amount current assets tend to lower profit. Firms

which are keen on achieving higher profits normally manage liquid assets aggressively and vice-

versa. Conversely, greater working capital lowers overall risk. Hence firms which are risk averse

normally have higher working capital.

Liquidity means the ease of conversion into cash. Liquidity management refers to the decisions

regarding maintaining the level of current assets in such a way that company has a strong enough

liquidity position and it has a good overall profitability also.

Holding current assets at a higher level, especially cash strengthens the firms liquidity position

but it also reduces the firms profitability. So there has to be a risk return trade-off between the

liquidity and profitability. Current assets should always be in excess of current liabilities so as to

ensure meeting the liabilities even if we are not able to liquidate all our assets. So it is a

conventional rule to maintain the level of current assets twice the level of current liabilities.

While maintaining a level of current assets, it should be always viewed in comparison to its

liabilities. A weak liquidity position poses a threat to the solvency of the company. Whereas

excess liquidity will result in tying up a lot more cash than optimum required. So current assetsshould be always maintained at such a level that firms short term creditors can rest assured that

the firm will be able to pay off their debt only with its current assets.

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The company with its policy of buying the major raw material on a daily basis and also with the

help of the recently implemented ERP solution has been able to plan its production to a very large

extent this has helped the company to also curb on the inventory levels required to be maintained,

it has also helped the Organization in lowering down the average value of days sales outstanding.

It has also helped to improve the logistics control and planning. Hence keeping this fact in mind

the company has been able to cut down on the current assets to some extend but still some scope

for improvement is still seen by the author.

This brings to light one of the most important aspects of any firm that is whether the company

follows an aggressive working capital policy or one that is highly conservative. These policies

involve a risk return trade off. The conservative policy refers to lower return and risk, while anaggressive policy produces more return with more risk, from the ratios calculated above we can

say that for the last year the policy of the company can be classified as one that was very

aggressive as the levels of current assets were low as can be seen from the current ratio, while for

the remaining years also the company has followed a more aggressive policy. In the past couple of

years this policy has also been benefitted by the implementation of the ERP solution.

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WORKING CAPITAL NEEDS:

Whenever any firm calculates working capital requirements the concept of operating cycle of the

firm plays a very important role. While there are other methods also that the company may look

forward to while determining its working capital requirements, these methods are:

1. Current assets holding period: this method is again based on the operating cycle, in this

method the working capital needs are estimated on the basis of average holding period of

the current assets of the company and then relating them to the costs.

2. Ratio of sales: this method is based on the assumption that the current asset value varies

with the amount of sales.

3. Ratio of fixed investment: this method calculates the working capital requirements as a

percentage of fixed investment.

At JK TYRES the method that is generally utilized is the method of current assets holding period.

In this method the company based upon its previous periods for current asset holding (in the

periods gone by) the working capital requirements for the coming period is generated and based

upon that the requirements are determined.

This method will become more clear from the following calculations where the author tries to

determine the working capital needs based on the financials of the company reported for the 18

month period from October 2007- march 2009. (The calculations have been shown in the

annexure)

For the above mentioned period the value for the various holding have been summarized in the

table given below and then the value has been obtained by multiplying the holding days with thevalue of daily consumption, in case of the debtors the value has been multiplied with the daily

sales:

(in days) 2007-09

RM-IMPORTED 25.09

RM-INDIGINIOUS 18.43

RM TOTAL 20.99

WIP 3.31

FG 30.11S & S 70.11

DEBTORS CONVERSION PERIOD - DOMESTIC 40.41

- EXPORT 90.27

OPERATING CASH 5.02

Table 2: Current Assets Turnover Days

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(in Rs. Crores) 2007-09

RM-IMPORTED 51.57

RM-INDIGINIOUS 76.97

RM TOTAL 128.54

WIP 25.63

FG 237.18

S & S 21.54

DEBTORS DOMESTIC 350.02

- EXPORT 123.35

OPERATING CASH 41.99

Table 3: Working Capital Need in Rupees

Upon the addition of all these values the company gets an estimate of the amount of working

capital that it may require in the coming period. The company to be on a safer side always goes onincreasing the working capital amount by some value so as to overcome any inflationary or other

adverse conditions the company may be subjected to in the future. Hence on an estimate the

company will be requiring around Rs. 1100 as working capital. Along with these calculations the

company also establishes some holding period estimates and then based upon the difference

between the previous period actual and the projections the total value is obtained.

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FUNDS FLOW STATEMENT FOR JK TYRE:

SOURCES

1. FUNDS FROM OPERATIONS 138.82. INCREASE IN LONG TERM LOANS 186.9

3. INCREASE IN SHARE CAPITAL 87.3

4. DECREASE IN OTHER ASSETS 3.0

415.9

USES

1. DIVIDENDS 13.0

2. ADDITIONS TO FIXED ASSETS 114.3

3. INCREASE IN INVESTMENTS 27.2

4. INCREASE IN CAPITAL WORK INPROGRESS 219.9

374.3

NET INCREASE IN WORKING CAPITAL 41.6

Table 4: Funds Flow Statement For J K TYRE

The table above shows that how the company was able to fund its requirements it clearly states

how the funds were utilized and from where were they obtained. This funds flow has been

established on a working capital basis. This statement is the one that is generally looked into by

the various bankers to determine whether the borrowers are able to maintain their minimumworking capital needs. This kind of statement is also generated at JK TYRE and is made available

to various banks that provide working capital loans to the company.

To study the accuracy of the net change as disclosed by the funds flow statement the author has

prepared a schedule of changes in working capital that is shown in the following table.

SCHEDULE FOR CHANGES IN WORKING CAPITAL

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CHANGE IN WORKING CAPITAL increase decrease

CURRENT ASSETS

RAW MATERIALS 24.7

STORES AND SPARES 9.5FINISHED GOODS 66.3

STOCK IN PROCESS 6.8

DEBTS OVER SIX MONTHS 9.1

OTHER DEBTS 2.2

INTEREST ACCRUED ON INVESTMENTS 0.1

CASH ON HAND 0.1

REMMITANCES IN TRANSIT AND

CHEQUES ON HAND 14.2

BALANCES WITH SCHEDULED BANKS 1.4

LOANS AND ADVANCES 59.9TOTAL CURRENT ASSETS 92.8 101.5

CURRENT LIABILITIES

ACCEPTANCES 2.6

CREDITORS 116.9

INVESTOR EDUCATION AND

PROTECTION FUND 0.1

OTHER LIABILITIES 62.9

INTEREST ACCRUED BUT NOT DUE ON

LOANS 2.3PROVISION FOR RETIREMENT BENEFITS 3.4

TOTAL CURRENT LIABILITIES 119.3 68.9

WORKING CAPITAL 212.1 170.4

INCREASE IN WORKING CAPITAL 41.6

TOTAL 212.1

Table 5: Schedule for Change in Working Capital

WORKING CAPITAL FINANCE:

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In India, generally short term funds are used to finance working capital. The two most significant

short-term sources of finance for working capital are: trade credit and bank borrowing. The use of

trade credit has been increasing over the past few years. Trade credit as a percentage of current

asset is about 40%. Bank borrowing is the next important source of working capital finance.

In case of JK TYRE both theses sources of finance for working capital are used extensively by thecompany. The company had short term loans of around 150.67 crores for the last fiscal year. Also

another 384.22 crores of amount was termed as other loans from bank which also was used for the

same purpose. The amount of trade creditors for the company for the same period was a whooping

468.90 crores down from 585.68 crores from 2007. This data clearly emphasizes the fact that

company makes use of these two sources of working capital finance very extensively. Now the

author intends to talk about the different sources used at JK TYRE in some details:

1. Accrued Expenses and Deferred Income: the accrued expenses represent that liability of the firm

that it has to pay for which the services have already been received. Hence they can be classified

as a spontaneous, interest free source of financing. Similarly deferred income represents fundsreceived by the firm for goods and services which it has agreed to supply in future. These receipts

increase the liquidity of the firm in the form of cash. In case of the JK TYRE as the dealers are

provided with the material strictly on the basis of advance payments made by them hence the

deferred income becomes an important source of finance for the company.

2. Overdraft: as explained in the section above this becomes a very important source of working

capital finance here at JK TYRE as the company has this facility being approved at various banks.

3. Cash Credit: at JK TYRE this form of working capital financing is a major source that is used

widely by the company. The company has been using of this facility of the banks at a very largescale of operations with the account balances fluctuating from being deficit for a majority period to

sometimes being in surplus, this facility is used by the company in fulfilling a number of its day to

day obligations. Also the major plus point for this facility is that with this kind of credit the

company can withdraw the amount as and when the need arises there is no need to withdraw the

complete amount at one. This is one of the most flexible arrangements with the banks that are

enjoyed by JK TYRE.

4. Purchase or Discounting of Bills: as explained earlier in the section on cash management this

again is another method that is resorted to at JK TYRE though the amount of it is very small in

comparison to the other sources utilized by the company, which are only around 30.1 crores.

5. Letter of Credit: this is another source of working capital finance that is used by the company

though this source is also not used extensively but still there are a number of banks with which this

facility has been opened up by the company. The various banks have sanctioned different value

LCs for the company. In this source of financing it is the bank that makes payment on behalf of

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the company to the clients of the company in case the company fails to keep up with its

obligations. The banks generally charge JK TYRE and the amount is predefined before the LC

arrangement is opened by the bank.

All the different sources of working capital finance explained above require some security. In case

of JK TYRE the company has used various modes of security such as hypothecation, pledge etc.The company has gone about using various sources as security for the amount of term loans from

the banks such as:

1. The movable and immovable property of its plants in Madhya Pradesh, Karnataka and

Rajasthan both present and future.

2. The company has also hypothecated its stocks and book debts for the amount of 384.22 crores

that has been raised from the banks and written down as other loans from banks in the balance

sheet.

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FINDINGS

Findings

MRF holds the biggest share of LCV tyres market & JK is on second position.

The company can control their working capital by way of optimization of working capital

cycle and maximizing credit to creditors and minimizing credit of customers by best

utilization of resources and minimizing stock level.

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The company can arrange for additional working capital by taking credit facility for a

temporary period i.e. adhoc facility, seasonal facility etc.

The company can control their working capital requirement by more realization of funds

and better negotiations with customers and suppliers and also maintaining optimum level

of stock

The company sources its working capital finance through two different ways i.e. the fixed

amount required for working capital from long term sources like long term loans, mortgage

loans and debentures etc and fluctuating working capital required from short term sources

like short term loans from banks etc

The company to deal in the competitive market and remain successful should focus highly

on and should have efficiency to operate the working capital limits keeping in view of

better resources availability, minimizing cost, maximizing production with optimum level

of stock.

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Recommendations and conclusion

Recommendations

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The following are the recommendations which can be suggested to the company:

1. The company makes use of SAP solution for the purpose of demand projections, while theauthor thinks that in order to have the projections even more accurate some method for

error calculations should also be included so as to make sure that the levels of finished

goods and raw materials for the company can be further improved which would add up to

the further improvement of operating efficiency of the firm and at the same time would

ensure that the working capital gap is shortened.

2. The method that the company follows for some of the raw materials is also not appropriate

as it adds up to the average inventory holding period for the company, this is generally

seen for some of the chemicals that are purchased in bulk at the time when the costs are the

lowest.

3. Another important source of improvement as per the author lies in the centralized

operations of the company, this method proves some kind of hindrance when we talk about

the operations taken part in the central part of INDIA while the major raw material comes

from the southern part of the country

4. the excessive dependence of the company on cash credit, is a major source of concern as

far as the author is concerned hence the author feels that the company can diversify its use

of other sources of finance as well which will again help to reduce the cost of this capital

for the company

Conclusion

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The performance of JK TYRES in recent years is good due to the up wising in the global market

followed by the domestic market. It is an upcoming one with good and innovative ideas andbelieved in improving all the areas of its operations. The company has a good liquidity position

and does not delay its commitment in case of both its creditors and debtors. The company being

mostly dependent on the working capital facilities, it is maintaining very good relationship with

their banks and their working capital management is well balanced.

Controlling of working capital requirement is done by the company by way of optimization of the

working capital cycle and maximizing credit to creditors and minimizing credit of customers by

best utilization of resources and minimizing stock level. Operating cycle time normally differ from

company to company which depends on nature of company and the operations to be performed by

the company.

The Company arrange for their additional working capital through by taking credit facility for a

temporary period i.e. adhoc facility, seasonal facility etc. Normally, the company sources its

working capital finance through two different ways i.e. the fixed amount required for working

capital from long term sources like long term loans, mortgage loans and debentures etc and

fluctuating working capital required from short term sources like short term loans from banks etc.

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Learning outcome

Learning outcome

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1) Understanding of how to analyze and compare the performance of any

companies with its competitor.

2) Knowledge about actual working environment in an organization.

3) Familiarity about various needs of working capital management in the firm.

4) Importance of the requirement of the optimal working capital in the firm.

5) Understanding how to make decisions regarding the various sources of

working capital funds.

6) Knowledge about corporate culture.

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BIBLIOGRAPHY

1. Annual reports of JK TYRES

2. Annual reports of MRF

3. KHAN AND JAIN, 2004. Financial Management. New Delhi: Tata

McGraw Hill.

4. PANDEY I.M., 2005. Financial Management. New Delhi: Vikas Publishing

House Pvt. Ltd.

5. http://www.capitaline.com

6. http://www.studyfinance.com

7. http://www.investopedia.com

8. http://www.jktyres.com

9. http://www.moneycontrol.com

10.http://www.bizresearchpapers.com/Kesseven.pdf

11.http://www.indianmba.com/Faculty_Column/FC285/fc285.html

12.http://www.indiastudychannel.com/projects/3085-WORKING-CAPITAL-MANAGEMENT.aspx

13.http://www.business-standard.com/pdf/jk_tyres__250110_01.pdf

14. http://www.exinfm.com/pdffiles/dba_wcm.pdf

15. http://im.sify.com/sifycmsimg/dec2009/Finance/14924491_JK_Tyre&Industries_Sep09Re

sults.pdf

16. http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/2/best-practice-working-capital-

management-techniques-for-optimizing-inventories-receivables-and-payables.pdf

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APPENDIX:Calculation sheets

Sheet no.1

FUNDS FLOW STATEMENT:

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Sheet no.2

Schedules for changes in working capital:

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Sheet 3

Ratio calculations:

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overview of indian tyre industry

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