1

OVERVIEW ON WORKING CAPITAL

1.1

INTRODUCTION:-

Working capital typically means the firms holding of current or short-term assets such as cash,
receivables, inventory and marketable securities. These items are also referred to as circulating
capital .Corporate executives devote a considerable amount of attention to the management of
working capital. Working capital (we) is regarded as the lifeblood of a business and it plays a
pivotal role in keeping wheels of a business enterprise running. However the management of
working capital is delicate area in the field of financial management as it involves frequent
decision making. Every organization, whether profit oriented or not, irrespective of its size and
nature of business needs a requisite amount of working capital. The efficient management of
working capital is crucial as it besides the servival, liquidity, solvency and profitability of
business organization concerned.
Working capital management (WCM) is recognized as an important concern of the financial
manger due to many reasons. A typical manufacturing firms current assets account for over half
its total assets and for a distribution company, they account for even more. The maintenance
excessive levels of current assets can easily result in substandard returns on a firms investment.
However, firms with inadequate levels of current assets may incur shortages of funds and have
difficulties in smoothly maintaining day to day operations. Efficient Working capital
management (WCM) involves planning and controlling current assets and current liabilities in a
manner that eliminates the risk of inability to meet due to short term obligations on the one hand
and avoid excessive investment in these assets on the other.
1.2

MEANING:-

There are two concepts of working capital gross and net. Gross working refers to the firms
investment in current assets. Current assets are those assets which can be converted into cash
within an accounting year. Net working capital refers to the difference between current assets and
current liabilities. Current liabilities are those claims of outsiders which are expected to mature
for payment within an accounting year.
Current assets includes: stock of raw materials, work-in-progress, finished goods, trade debtors,
pre-payments, cash balances etc.
Current liabilities includes: trade creditors, accruals, taxation payable, bills payable, outstanding
expenses, dividend payable, short term loans.
Working Capital is a measure of a company's short term liquidity or its ability to cover short
term liabilities. Working capital is defined as the difference between a company's current assets
and current liabilities. That is,

Working Capital = Current Assets - Current Liabilities.

Analysts use working capital to determine how easily a company can meet its liabilities over a
short time horizon. It is also used when calculating other financial metrics like free cash flow.
When management uses working capital as a basis for business decisions their goal is to make
sure the company is able to continue its operations in the short term while covering any nearterm debt as well as operating expenses.
Working capital is also known as operating capital. A most important value, it represents the
amount of day to day operating liquidity available to a business. A company can be endowed
with assets and profitability, but short of liquidity if these assets can not readily be converted into
cash.
A positive working capital means that the company is able to pay off its short term liabilities. A
negative working capital means that the company is unable to meet its short term liabilities.
2

From the point of view of time, the term working capital can be divided into two categories viz.,
permanent and temporary. Permanent working capital refers to the hardcore working capital. It is
that minimum level of investment in the current assets that is carried by the business at all times
to carry out minimum levels of its activities.

1.3

DEFINITIONS:-

Working Capital refers to that part of the firms capital, which is required for financing shortterm or current assets such a cash marketable securities, debtors and inventories. Funds thus,
invested in current assets keep revolving fast and are constantly converted into cash and this cash
flow out again in exchange for other current assets. Working Capital is also known as revolving
or circulating capital or short-term capital.
A measure of both a company's efficiency and its short-term financial health. The working
capital ratio is calculated as:

Concept of working capital

There are two possible interpretations of working capital concept:

1. Balance sheet concept
2. Operating cycle concept

Balance sheet concept

There are two interpretations of working capital under the balance sheet concept.
a. Excess of current assets over current liabilities
3

b. gross or total current assets.

Operating cycle concept

A companys operating cycle typically consists of three primary activities:

Purchasing resources,

Producing the product and

Distributing (selling) the product.

These activities create funds flows that are both unsynchronized and uncertain.

Unsynchronized because cash disbursements (for example, payments for resource purchases)
usually take place before cash receipts (for example collection of receivables).
They are uncertain because future sales and costs, which generate the respective receipts and
disbursements, cannot be forecasted with complete accuracy.

1.4

The firm has to maintain cash balance to pay the bills as they come due.

In addition, the company must invest in inventories to fill customer orders promptly.

And finally, the company invests in accounts receivable to extend credit to customers.

Operating cycle is equal to the length of inventory and receivable conversion periods.

IMPORTANCE OF ADEQUATE WORKING CAPITAL:-

The importance of adequate working capital in commercial undertaking can be judged from the
fact that a concern needs funds for its day-to-day running. Adequacy or inadequacy of these
4

funds would determine the efficiency with which the daily business may be carried on.
Management of working capital is an essential task of the financial manager. He has to ensure
the amount of working capital available with his concern is neither too large nor too small its
requirements. Large amount of working capital would mean that the company has idle funds
since funds have a cost; the company has to pay a huge amount as interest on such funds. The
various studies conducted by the bureau of public enterprises have shown that one of the reasons
of poor performance of public sector undertakings in our country has been the large amounts of
funds locked up in working capital. This results in over capitalization. Over capitalization
implies that company has too large funds for its requirements, resulting in a low return a
situation which implies a less then optimal use of resources. A firm has, therefore, to be very
careful in estimating its working capital requirements.
If the firm has inadequate working capital, it is said to be under-capitalized. Such a firm runs the
risk of insolvency. This is because; paucity of working capital may lead to a situation where the
firm may not be able to meet its liabilities. It is interesting to note that many firms which are
otherwise prosperous (having good demand for their products and enjoying profitable marketing
conditions) may fail because of lack of liquid resources.
If a firm has insufficient working capital and tries to increase sales, it can easily over-stretch the
financial resources of the business. This is called overtrading. Early warning signs of overtrading
include:

Pressure on existing cash.

Exceptional cash generating activities e.g., offering high discounts for cash

payments.
Bank overdraft exceeds authorized limits.
Seeking greater overdraft or lines of credit.
Part-paying suppliers or other creditors.
Paying bills in cash to secure additional supplies.
Management pre-occupation with surviving rather than managing.
Frequent short term emergency requests to the banks (to help pay wages,
pending receipt of a cherub)

Every business needs adequate liquid resources in order to maintain day-to-day cash flow. It
needs enough cash to pay wages and salaries as they fall due and to pay creditor if it is t keep its
workforce engaged and ensure its supplies.
Maintaining adequate working capital is not just important in the short-term. Sufficient liquidity
must be maintained I order to ensure the survival of the business in the long-term as well. As
they fall due. Therefore, when business make investment decisions they must not only consider
the financial outlay involved with acquiring the new machine or the new building, etc., but must
also take account of the additional current assets that are usually required with any expansion of
activity.
Increased production leads to hold additional stocks of raw materials and work in progress.
Increased sales usually mean that the level of debtors will increase. A general increase in the
firms scale of operations tends to imply a need for greater levels of working capital.
A question then arises what is an optimum amount of working capital for a firm? We can say that
a firm should neither have too an amount of working capital nor should the same e too low. It is
the job of the finance manager to estimate the requirements of working capital carefully and
determine the optimum level of investment in working capital.
1.5

SIGNIFICANSE OF WORKING CAPITAL MANAGEMENT:-

The current assets of a typical manufacturing firm account for over half of its total assets. For a
distribution company, they account for even more. Excessive levels of current assets can easily
result in a firm realizing a substandard return on investment. However, firms with too few
current assets may incur shortage and difficulties in maintaining smooth operations. For small
companies, current liabilities are the principal source of external financing. These do not have
access to the longer term capital markets capital markets, other than to acquire a mortgage on a
building. The fast growing but larger company also makes use of current liability financing. For
these reasons, the financial manager and staff devote a considerable portion of their time to
working capital matters.
The management of cash, marketable securities, accounts receivable, accounts payable, accruals,
and other means of short-term financing is the direct responsibility of the financial manager; only
6

the management of inventories is not. Moreover, these management responsibilities require

continuous day-to-day supervision. Unlike dividend and capital structure decisions, you cannot
study the issue, reach a decision, and set the matter aside for many months to come. Thus,
working capital management is important, if for no other reason than the proportion of the
financial managers time that must be devoted to it. More fundamental, however, is the effect
that working capital decisions have on the companys risk, return, and share price.
Profitability and Risk:Underlying sound working capital management lie two fundamental decision issues for the firm.
They are the determination of,
1. The optimal level of investment in current assets.
2. The appropriate mix of short-term and long-term financing used to support this investment in
current assets.
In turn, these decisions are influenced by the trade-off that must be made between profitability
and risk. Lowering the level of investment in current assets, while still being able to support
sales, would lead to an increase in the formals return on the total assets. To the extent that the
explicit costs of short-term financing are less than those of intermediate and the long-term
financing, the greater the proportional of short-term debt to total debt, the higher is the
profitability of the firm.
Although short-term interest rates sometimes exceed long term rates, generally they are less.
Even when short-term rates are higher, the situation is likely to be only temporary. Over an
extended period of time, we would expect to pay more in interest cost with long-term debt than
we would with short-term borrowings, which are continually rolled over (refinanced) at maturity.
Moreover, the use of short-term debt as opposed to longer-term debt is likely to result in higher
profits because debt will be paid off during periods when it is not needed.
1.6

MANAGEMENT OF WORKING CAPITAL:-

Working capital (WC) is regarded as the life blood of a business and it plays a pivotal role in
keeping the wheels of a business enterprise running. However, the management of WC is a
7

delicate area in the field of financial management as it involves frequent decision making.
(Jogindar singh duttta, 2000). Every organization, whether profit oriented or not, irrespective of
its size and nature of business, needs a requisite amount of WC. The efficient management of
WC is crucial as it decides the survival, liquidity, solvency and profitability of the business
organization concerned (Mukhopadhyya , 2004). WC management (WCM) is recognized as an
important concern of the financial manager due to many reasons. A typical manufacturing firms
current assets account for over half of its total assets and for a distribution company, they
account for even more. The maintenance of excessive levels of current assets can easily result in
a substandard return on a firms investment. However, firms with inadequate levels of current
assets may incur shortages of funds and have difficulties in smoothly maintaining day-to-day
operations.

Efficient WCM

involves planning and controlling current assets and current

liabilities in manner that eliminates the risk of inability to meet due to short term obligations on
the one hand avoid excessive investment in these assets on the other (Elijelly, 2004).
1.7

IMPORTANCE OF EFFICIENT WCM:-

The importance of efficient wcm is indisputable as the wc is the difference between resources in
cash or which are readily convertible into cash (current assets) and organizational commitments
for which cash will soon be required.
The level of current assets changes constantly and regularly depending up in the level of actual
and forecasted sales. This requires that the decisions to bring the levels of current assets should
be made at the earliest opportunity and as frequently as required. The changing levels of current
assets may also require review of the financing pattern. Current assets usually represent a
substantial portion of the total assets of a firm, resulting in the investment of large chunk of
funds in the current assets. There is an obvious and inevitable relationship between the growth of
sales and the level of current assets.

2
8

REVIEW OF LITERATURE
2.1

INTRODUCTION:-

WCM is a very sensitive area in the field of financial management. It involves the quantification
of various components of wc and combination of current assets (CAs) and the financing of these
assets. Before entering into the empirical study, we may throw a little light on the existing
literature on the management of working capital. During the last few decades several studies
have been conducted , both in India as well as abroad, regarding the various aspects of working
capital management. A brief explanation of some of the studies is shown below.
The literature work on wcm was pioneered by john bauer (1916). He examined the pattern of
operating revenue for this period was $2,00,000 and the expenses incurred were $1,20,000. This
contributed to the necessity of working capital. If the company is a new one, with its actual fixed
capital and volume of business, it would practically have to provide this amount in its initial
investment. Thus, the company actually has to tie up this sum in the business, which in turn earns
a return on the amount. vijayakumar and venkatachalam (2003), in their paper entitled, working
capital management A case study of Tamil nadu sugar corporation, indicated a moderate trend in
the financial position and the utilization of wc. They also suggested that attempts should be made
to use funds more effectively to keep an optimum level of wc since holding more current assets
causes reduction in profitability.
2.2 TEMPORAL STUDIES:Deloof (2003) evaluated wc management effect on the profitability of selected began firms and
stated that there are companies which have large amount of cash invested in wc and there is a
significant negative relation between gross operating income and the number of days, accounts
receivable, inventories and accounts receivable, payable of firms, the suggested that the
managers could create value for the shareholders by reducing the number of days for accounts
receivable and inventories to a reasonable level. The negative relation between accounts payable
and profitability is consistent with the view that less profitable companies wait longer to pay
their bills.
9

Samiloglu and demiraunes (2008), on their study, the effect of we management on the firm
profitability in turkey firms, analyzed the effect of wc management on the profitability of the
firms. They found that the accounts receivable period, inventory period and leverage affect the
profitability of the firms negatively while growth affects the firms profitability positively. Uyar
(2009), in his paper titled, the relationship of cash conversion cycle (CCC) with firm size and
profitability: An empirical investigation of turkey firms, examined the industry benchmarks for
CCC of merchandising and manufacturing companies and found that merchandising industry has
shorter CCC than manufacturing industries. Further, the study examined the relationship between
the length of CCC and the firm size, in terms of both net sales and total assets . The study
further showed significant negative correlation between the length of CCC and profitability.
Azhagaiah and muralldhran (2009), in their paper entitled,
The relationship between working capital management efficiency and EBIT, analyzed the
relationship between working capital management efficiency and earnings before interest &
taxes of the paper -industry in India during 1997-1998 to 2005-2006. To measure the WCME,
three index values viz., performance index, utilization index, utilization index, and efficiency
index were computed and associated with explanatory variables. Further, fixed financial assets
ratio, financial debt ratio and size are considered as control variables in the analysis and are
associated with the EBIT. The study reveals that the paper industry had managed the WC
satisfactorily. The accounts payable period has a significant negative relationship with EBIT,
which indicates that by deploying payment to suppilers , they improve the EBIT.
Chinta Venkatesswara Rao et al., (2010), in their study, financial management focus on
working capital utilization in the Indian Cotton textile Industry: Methodological Analysis,
analysed the trends and patterns of efficiency of WC utilization in respect of size of firms of
cotton textile sector in India by the application of three indices viz , Performance Index (PI),
Utilization Index (UI), and Efficiency Index (EI). The study reveals that Linear Growth Rate
(LGR) of PI, UI and EI in respect of Wc efficiency for small size firms size is significant while
in the case of the medium size firms, the trend of UI alone is significant. The trend of PI, EI and
UI for size firms is insignificant. After thorough understanding of the various studies undertaken
by different authors and the research techniques used for analyzing the data on working capital
management determinants, efficiency, and working capital capital utilization, relationship with
10

cash conversion cycle with firm size and profitability, the Researcher has taken up the work of
analyzing data to study the impact of working capital management ratios on profitability with
regard to list Sugar Industry in India.
2.3

Significance of the study:-

The study proposes to indentify the impact of WCM on profitability through empirical analysis
across Sugar Industry in India. efficient management of WC is a fundamental part of the overall
corporate strategy in creating the shareholders value. Today, management of WC is one of the
most important and challenging aspects of the overall financial management. Optimization of
WC balance means minimizing the WC requirements and realizing maximum possible revenues.
Efficient WCM increases firms growth opportunities bad returns to shareholder. Very few
studies have been made on WCM relating it to profitability, that too in Sugar Industry in India.
Therefore, the present study is a maiden attempt to analyze the impact of WCM on Profitability
of Sugar Industry in India.
2.4

Objectives of the Study:-

The analyze the growth trend of returns on investment (profitability) of sugar industry in India
over the period under study.
To analyze the determinants of profitability by examining the sensitivity of returns on investment
(profitability) to changes in the level of working capital of the corporate firms in sugar industry
in India.

3
11

RESEARCH METHODOLOGY
The purpose of the present study is to contribute to a very important aspect of financial
management known as WCM, with reference to Sugar Industry in India. The study tries to
provide new insights into the existing literature in the field of finance, particularly the impact of
WCM on profitability. This research deals with the analytical framework of data analysis, which
describe the industry and variables included in the study, the distribution patterns of data and
statistical techniques employed in investigating the relationship between WCM and profitability.
3.1

Structure of sugar industry in india:-

India is the second largest of sugar, after brazilin the world the sugar industry occupies an
important place in the Indian economy. Nearly 7.5 million people across the country are directly
or indirectly employed in the industry and over 50 millions people depend on their livelihood
from growing and supplying sugarcane. The sugar industry contributes annually around RS. 50
billion by way of excise duty, cuss, vat, entry tax and octopi. The discovery of

sugar from

sugarcane originated in New Guinea and spread to southaest-asia and India. The sugar industry is
the second largest agro-based industry, next to textiles, in India.

Sugar is produced from

sugarcane and sugar beet. Approximately 70 per cent of sugar is produced from sugar cane and
30 per cent is produced from sugar beet. Sugarcane is grown in semitropical region while beet is
grown in temperate climate.
Sugar industry is cyclical in nature. Indian domestic sugar market is one of the largest markets
in the world; in volume terms. It remains a key growth driver for world sugar, growing above the
Asian and world consumption growth average. Sugar is one of the most important cash crops in
the world and hence there is always a wrestle to control its imports/export. The sugar economy in
India, like many other countries, is highly regulated, starting from sugarcane to the endproduct
sugar. Even the byproducts are subject to government control. The project aims to delve into the
issues faced by the industry and its trade prospects.
The project would also explore the impact on sugar volumes and prices because of its use as
alternative fuel. Supply side and demand side impact would be analyzed for complementary
(sugarfree) and supplementary products. The paper also highlights convincing evidence that oil
12

prices may trend higher over the next two decades and this would have a substantial negative
macroeconomic impact for India. A 50% increase in oil prices between 20102030 would
significantly reduce economic growth, real consumption and household income. Expansion of
biodiesel is one policy response India can use to counteract the economic impacts of oil price
hikes. Biodiesel intervention can significantly counteract these negative impacts whereas ethanol
intervention has a minimum offsetting impact.
Combining supplyside energy solutions, like biodiesel development, together with modest
energy efficiency. Sugar is made from sugarcane, which was arguably discovered thousands of
years ago in New Guinea. From there, the route was traced to India and Southeast Asia. It was
India which began producing sugar following the process of pressing sugarcane to extract juice&
boil it to get crystals. It was in 1950-51 the government of India made serious industrial
development plans and set the targets for production and consumption of sugar. It projected the
license and installment capacity for the sugar industry in its Five Year Plans.
The linkages between sugar, oil and ethanol prices are clear and very important considerations in
future as the ethanol market continues to develop. Sharp increases in oil prices may tend to exert
upward pressure on ethanol prices during harvest, and growing tendency to fix physical ethanol
prices with the New York contract may emerge at times of volatile oil prices. The establishment
of an international ethanol futures exchange was attempted during the oil crises of 1973 and
1979, however, failed due to lack of liquidity. There are considerations in the global market now
that were less present three decades ago, such as concerns to abate greenhouse gas emissions for
climate change mitigation and environmental sustainability. The comovement between sugar
and crude oil prices has developed mostly because of the strong link between ethanol and sugar
production in Brazil, the worlds largest sugar producer and exporter accounting for about 38
percent of world exports and 19.5 percent of production. The growing number of Brazilian flex
fuel vehicles which can run on any combination of gasoline and ethanol directly influences the
demand for ethanol. As consumers react to the relative price differential between ethanol and
gasoline, any increase in the price of gasoline stimulates demand for ethanol, reduces sugar
exports and raises world sugar prices. At the world level currently, it is estimated that about 15
percent of sugar crops are converted into ethanol rather than sugar.
13

3.2

Types of Sugar industry:-

Types of Sugar Industry in India:The sugar industry can be divided into two sectors including organized and unorganized sector.
Sugar factories belong to the organized sector and those who produce traditional sweeteners fall
into unorganized sector. Gur and khandsari are the traditional forms of sweeteners.
Manufacturing Process followed in Sugar Industry in India:Several steps are usually followed to produce sugar. These steps can be mentioned as below:

Extracting juice by pressing sugarcane

Boiling the juice to obtain crystals

Creating raw sugar by spinning crystals in extractors

Taking raw sugar to a refinery for the process of filtering and washing to discard
remaining non-sugar elements and hue

Crystallizing and drying sugar

Packaging the ready sugar

Machinery Suppliers for Sugar Industry in India:Some of the suppliers that offer cutting-edge machines to the companies involved in sugar
industry of India are:

Sakthi Sugars Ltd

14

3.3

Sri Sujay Engineering Products

Sri Vijayalakshmi Industries

Murthy Industries

Parveen Perforaters & Allied Industries

Aeromen Engg Co

Kamla Foundry & Workshop

Tinytech Plants

Baba Vishwakarma Engineering Co. (P) Limited

sugar prices:-

According to the Indian sugar manufacturers association (ASMA), the cost of production in
north India , where sugar recovery from cane is about 9.5 per cent, works out to Rs. 29 per
kilogram, even after factoring in returns from by products such as ethanol and losses incurred on
levy sugar supplies at a low fixed price of Rs. 18.50 per kilogram.

When Government

discontinued free sugar exports, sugar prices fell from an ex-factory price of about Rs. 30 per
kilogram to Rs.28 per kilogram in Uttar Pradesh and to Rs. 26 per kilogram in Maharashtra.
Despite good output, sugar prices are expected to stay firm in 2011. Traders, analysts and millers
expect the ex-mail prices to remain in the range of Rs. 34-35 per kilogram and the gap between
demand and supply is expected to be narrow.
3.4

steps for production of sugar:

Extracting juice by pressing sugarcane.

Boiling the juice to obtain crystals.
Creating raw sugar by spinning crystals in extract.
Taking raw sugar to a refinery for the process of filtering and washing to discard
remaining non-sugar elements and hue.
15

Crystallizing and drying sugar.

Packaging the ready sugar.

Table 1
Production & Consumption of Sugar in India (in million tons)
1999-2000 To 2009-2010
Year

Production

Consumption

% of consumption to
Production

1999-2000

20.22

17.30

85.56

2000-2001

20.48

17.85

87.16

2001-2002

20.48

19.76

96.48

2002-2003

22.14

20.26

91.51

2003-2004

15.15

19.12

126.20

2004-2005

14.17

20.39

143.90

2005-2006

21.14

19.87

93.99

2006-2007

30.78

22.43

72.87

2007-2008

28.63

23.50

82.08

2008-2009

15.95

24.20

151.72

2009-2010

20.54

23.50

114.41

Source : Ministry Of Agriculture, Indian Corporate sugar firms Association.

16

The production and consumption of sugar in India during 1999-2000 to 2009-2010 are shown in
Table -1 and Chart A & Diagram of table There was a decline in consumption of sugar when
compared to the production. For example, during the period 2005-2006 to 2007-2008, the
consumption of sugar came down from 143.90% to 82.08% from 151.72% in 2008-2009 to
114.40% in 2009-2010. While the production had stated to resurge in 2008-2010 and it is likely
to gain strongly in 2011-12. The trend of production and consumption of sugar in India reveals
that the consumption surpasses the production, giving room for scaling up of the sugar
production as well the opportunity to import sugar for domestic consumption. The consumption
price will drastically rise in the years to come unless some serious measures are taken by the
policy makers in this regard.
3.4

Diagram Of Table 1

Production and consumption Of sugar in India

17

160
140
120
100
80

Production
Consumption
% of consumption to
Production

60
40
20
0

3.4 Chart-A:Production and Consumption of Sugar in India during

18

35

30

25

20

Production

15

Consumption

10

1999-2000 to 2009-2010 (million tons).

Source: Ministry of Agriculture, Indian Corporate sugar firms Association

3.5

Data Collection and Period of the Study:-

19

Since the study is based on financial data, the main sources of data were financial statements
such as balance sheets, income statements of listed corporate firms for the period from 20052010, which were collected from secondary sources i.e., annual reports of the company, CMIE
prowess database and from different websites concerned.
The data used for the study are related to the selected Sugar Industry in India for a period of five
years, on a year to year basis, ranging from 2005- 2010. There are two basic reasons behind the
selection of the period as the period of study:
I. This period relates to the post-liberalization era of the Indian Economy.
II. This is the period for which the maximum financial data were available in the
database.

3.6

Sampling Design:-

The study followed multi-stage sampling technique for ultimate corporate firms selection as
described in the following paragraph. The total number of firms under the sugar industry
incorporated in India are 155, out of which, 35 firms have listing-flag with Bombay Stock
Exchange as well as with National Stock Exchange. However, full-fledge data is required for the
study were available for 28 corporate firms only. Hence the final sample units constitute 28
corporate firms of sugar industry in India.

3.6 Multi-Stage Sampling Technique

20

Total Number of corporate sugar firms = 155

STAGE 1

STAGE 2

BSE & NSE Listing companies = 35

Full-fledged data available for the Study Period = 28 Listed

STAGE 3

3.7

Research methods:-

WCM Measures (Ratios) For measuring the WCM, simple mathematical tool, viz ratio, was
extensively used. The ratios relating to WCM, which have been computed and used for the
analysis, are shown Table-2.

Table 2

21

WCM Measures (Ratios) With Elements of Ratios and Description of Ratios

WCM Measures (Ratios)
Current Ratio (CR)

Elements of Ratios
Current Assets / Current

Description of Ratios
Current Assets include cash,

liabilities

accounts receivables,
inventory, marketable
securities, prepaid expenses
and other liquid assets that
can be readily converted
into cash. Current liabilities
include short term debt,
accounts payables,
accrued liabilities and other

Quick Ratio (QR)

Quick Assets / Quick

debts.
For calculating quick assets,

Liabilities

stock and prepaid expenses

are excluded from current
assets in order to have high
degree of liquidity of current
assets. Quick liabilities are
calculated by eliminating bank
overdraft from current

Debtors Turnover Ratio

Net Credit Sales / Average

liabilities.
The trade debtors for the

(DTR)

Debtors

purpose of this ratio include

the amount of Trade Debtors
& Bills Receivables. The
average receivables are found
by adding the opening
receivables and closing
balance of receivables and

Inventory Turnover Ratio

Net Sales / Inventory

22

dividing the total by two.

Net sales is the amount of

(INV)

sales generated by a company

after the deduction of returns,
allowances for damaged or
missing goods and any
discount allowed. Average
inventory is the median value
of an inventory throughout a
certain time period. The basis
calculation for average
inventory would be: (Current
Inventory + Previous

Cash Turnover Ratio (CTR)

Net Sales / Cash Balances

Inventory) / 2
Net sales is the amount of
sales generated by a company
after the deduction of returns,
allowances for damaged or
missing goods and any
discounts allowed. The sales
number reported on a
companys financial
statements is a net sales
number, reflecting these
deductions. The cash balance

WC Turnover Ratio (WCTR)

Net Sales / Net WC

is the closing balance of cash.

Net sales is the amount of
sales generated by company
after the deduction of sales
returns, allowances for
damaged or missing goods
and any discounts allowed. A
company uses WC (current
assets current liabilities) to

23

fund operations and purchase

Return on Investment (ROI)

PAT / Average Total Assets

inventory.
PAT is the net profit earned by
the company after deducting
all expenses like interest ,
depreciation and tax. Average
total assets is the average of
the aggregate assets during a
two year period, i.e., Total
Assets (current year) + Total
Assets (previous year) / 2.
Total assets include all gross
investments, cash and
equivalents, receivables, land
and building, plant and
machinery, furniture and
fitting and intangible assets.

4
ANALYSIS AND INTERPRETATION OF
DATA
24

4.1

Analysis:-

Chart-B shows that there was a steep fall in profitability of sugar corporate firms during the year
2007-08 and afterwards there was a rise in the profitability during the following years. Some
sample units recorded negative value in the year 2008 and 2009 because the sugar prices doubled
over the years. Particularly in 2008-2009, a larger part of the sugarcane was used for making gur
than in the earlier years so that the world sugar production went down when compared to the
earlier season. The world sugar balance for the period from October 2008 to September 2009
puts world production at 16-16.5 million tonnes , which was lower than the world consumption
of 20-22 million tonnes. Thus, the distinctive global surplus phase ended and the market moved
into a deficit phase during this period.
Table- 3 shows that the overall profitability of sample units in Sugar Industry was quite good
and the mean profitability of most of the companies was positive over the years under study.
Even though EID Parry recorded the highest mean profitability was fluctuating over the period
under study. Bannari Amman Sugar Ltd and Ponni Sugar Ltd, recorded the next most highest
mean profitability (10.46 and 10.11) and the CSGR was positive (0.071 and 0.144), indicating
that the corporate firms were able to maintain better profitability level without any fluctuation
over the years of study.
The deviation of profitability was higher in EID parry (13.51) from the highest mean
profitability when compared with the other companies. The KM Sugar Mills shows the text
highest deviation due to a lot of fluctuations and negative values over the period 2008-2009 and
its mean profitability and CAGR was negative. It is better to have lesser deviation in the
profitability level.
4.1 Chart B :-

25

PROFITABILITY
8.00
7.34
6.00

6.06

4.00
3.18
2.00

0.00
2005-06
-2.00

PROFITABILITY

2.30

2006-07

2007-08

2008-09

2009-10

-1.93

-4.00

T
rend of Profitability of Sugar Industry in India
Trend of Profitability of Sugar Industry in India over the
Period of Study

Source:- Computed results Based on Complied data collected from CMIE Prowess Pvt. Ltd

26

27

28

The Descriptive Statistics (see Table-4) shows that Debtors Turnover Ratio (DTR) recorded that
highest mean value. The standard deviation from the mean was so high. The DTRs also
recorded higher standard deviation, indicating that the debt collection period carried highly
within the industry. Creditors Turnover Ratio (CTR) also registered high standard deviation but
the Current Ratio (CR) and the Quick Ratio (QR) recorded low standard deviation from the mean
value, indicating that there was not much of variation in the level of Cash and Quick Assets
(QAs)
Table 4
29

Descriptive Statistics of Listed Sugar Corporation Firms in India.

Variables
ROI
CR
QR
WCC
DTR
CTR
INV

N
28
28
28
28
28
28
28

Minimum
-4.868
.772
.066
-49.727
2.580
9.050
1.473

Maximum
13.508
2.486
1.872
232.889
572.652
364.220
13.074

Mean
3.38957
1.33493
43614
9.6142
69.82379
67.63179
4.33757

SD
4.046534
.454576
.364071
47.269052
121.092163
72.941777
2.775484

Source: Computed result based on complied data collected from CMIE prowess Pvt. Ltd.

4.2

Limitation and Scope for Further Studies:-

The analysis was limited to five years only (i.e. from 2005-2010) and hence a detailed trend
covering a longer period could not be made.
The study was based on secondary data which were collected from CMIE Prowess. The quality
of the study depends purely on the accuracy, reliability and quality of secondary data source.
The study was limited to 28 corporate firms of sugar industry in India and hence the accuracy of
results is purely based on the data of sample firms for the study.
WCM is an important component of corporate financial management but it has not been
recognized in financial literature unlike capital structure, capital budgeting and divided policies.
Because of this reason, the valid research relating to WCM is found to be scanty in India. Hence
there is much to be done about WCM in India and the following areas offers scope for further
studies.
Further research could be carried out on the same area with a larger number of sample
companies, lengthening the years of study, by referring to other data source like Capital Plus etc.
Study on small and medium sized companies could be undertaken by taking large sample,
covering more number of years.

30

Also studies of WCM in different sectors and companies between sectors and cross sectors
would add to the existing literature.
4.3

Concluding Remarks:-

There is a significant positive coefficient between CR and ROI (5.263), INV and ROI (1.110) at
5% level. Also there is a significant negative coefficient between QR and ROI (-10.582), WCC
and ROI (-0.036) at 5% level. DTR recorded highly significant negative coefficient (-0.020) at
1% level with ROI. CTR registered insignificant positive coefficient (0.014) with profitability.
The overall regression model fit, which is represented by r2, is above 50% (0.51).
After the downtrend in the last two years of the study period, the sugar industry in India is a
poised to reap a rich harvest in the season beginning October 2010. The sugar production in the
country experienced an increase production in 2010-2011 against 19 million tonnes in 20092010. The production of sugarcane is cyclical in nature. Hence the sugar production is also
cyclical as it depends on the sugarcane production in the country.
Dual Pricing System is adopted in Sugar Industry in India, which includes sugar price in the
public distribution system and the free sale sugar price.

The sugar corporate firms are

overburdened with surplus inventories that most of them do not have adequate storage facilities,
capacities and cash flows, which have led them to resort to distress sale of sugar, which only
bring down the prices,
There are more by-products produced by sugarcane like ethanol, molasses (used by breweries),
biogases (used by co-generation plants) and the remaining are utilized by the gur and khandsari
sectors.

4.4

Hypotheses development:-

H1: There is no significant relationship between current ratio, liquid ratio, inventory turnover
ratio and profitability.

31

H2: There is no significant relationship between working capital turnover ratio as well as
debtors turnover ratio and profitability.
H3: There is no significant relationship between cash turnover ratio and profitability.

5
FINDINGS, SUGGESTION AND
CONCLUSION
5.1

FINDINGS:-

32

Biofuel Policy:- Indias biofuel policy is comprehensive and gives a broad outline to all the
major areas that need attention. These guidelines have to be translated into a biofuel program
and a series of projects to reap the potential benefits. Given the vast differences in the economic
performances and crosssectoral implications of ethanol and biodiesel, the biofuel policy can
serve better if these two sectors are dealt with separately.
Potential for Producing Biofuels:- Simple natural resource accounting shows that 20%
blending of ethanol with petrol can be achieved by 2017, only if sugar cane juice is converted to
ethanol to supplement molasses ethanol. Sweet sorghum (SS) and tropical sugar beets (TSB) are
still at the initial stage of development and face major technological and financial constraints.
About 32 million hectares of wasteland are required for biodiesel production together with yield
improvements to meet a 20% blending target with petroleum diesel. However, it is unlikely that
India can achieve the 20% blending target by 2017 given the current infant stage of the biodiesel
industry in the country.
Food Security:- At the current level of productivity, a 20% blending of sugar cane based ethanol
cannot be achieved without affecting the food sector. SS and TSB will also compete with the
food sector for land and water. However, molasses based ethanol blending does not have any
impact on the food sector. If confined to wastelands and using only limited irrigation during the
establishment phase of the crops, biodiesel production will not have any adverse impact on the
food sector.
Technological Constraints:- The sugarcane sector is well organized and there are no major
technological or other constraints, which prevent meeting the blending targets. The SS and TSB
supply chains are yet to be fully developed and they face a major bottleneck at the juice
extraction segment of the supply chain making juice extracting units financially unattractive. In
contrast to sugarcane, the biodiesel supply chain is in its infancy and understanding the
agronomy of the crops and development of nurseries and plantations with high yielding varieties
are major constraints, which need to be removed for the sector to take off.
Impact on Water:- Sugarcane is a water intensive crop but if confined to existing sugarcane
lands or to molasses based ethanol, ethanol production will not add to the irrigation water
demand. Biodiesel crops most likely will not add to the water problems if confined to limited
irrigation in the early stage of the crop establishment.
Environmental Impacts: Both ethanol and biodiesel crops have limited negative environmental
33

impacts which can be easily mitigated using available technologies and regulatory measures.
Compared to ethanol, biodiesel crops have a number of positive environmental effects and their
carbon benefit potential is also large. There are no foreseeable negative social impacts of
biodiesel.
Financial Feasibility Ethanol:- Ethanol production is not profitable under the administratively
determined price of Rs21.5/liter. The recent price revision may provide adequate profits to
producers.
Financial Feasibility Biodiesel:- Biodiesel production is also not financially feasible under the
current pricing mechanism. The current administratively determined price of Rs26.5/liter needs
to be revised to provide financial incentives along the supply chain.
Economic Feasibility Ethanol: Molasses based ethanol is economically feasible at the current
price of oil and increases of oil prices make molasses based ethanol economically more
attractive. The diversion of ethanol from current uses in industry and as potable alcohol is not
economically viable. The cost of sugarcane juice based ethanol exceeds the social benefits,
hence, sugar cane juice ethanol is not economically justifiable. Higher oil prices do not make
sugarcane juice based ethanol economically attractive. Therefore, sugarcane based ethanol will
not be economically viable even in the future. Alternative feed stocks such as TSB and SS are
not economically feasible at current oil prices. Therefore the ethanol sector should revise its
national targets to an economically beneficial target up to 5% blending only using molasses
ethanol.
Economic Feasibility Biodiesel:- Both jatropha and pongamia provide acceptable economic
returns at current oil prices, and an increase in the price of diesel makes biodiesel economically
more attractive. Employment generation and CDM benefits are also significant in the case of
biodiesel. Therefore, the expansion of biodiesel production is socially desirable and the results of
this report support an aggressive program for biodiesel in India.
Economy Wide Impact of Biodiesel: The Indian general equilibrium model, with only biodiesel
interventions, shows that biodiesel could provide India with an opportunity to enhance economic
growth and the wellbeing of rural populations. The national biofuel program has the potential
to create a significant number of jobs with substantial real wage increases; hence, it is a potential

34

avenue for poverty reduction within an inclusive growth policy framework. The negative effect
of the program, i.e. higher fiscal deficits, seems not to dampen the growth effect. In contrast, the
20% ethanol blending does not add much value to the economy.

5.2

SUGGESTIONS:-

Separate Policies for Ethanol and Biodiesel: Separate policies for ethanol and
biodiesel would serve the two sectors better given the difference in economic

performance and other issues.

Focus on Molasses based Ethanol: Ethanol production should be limited to

molasses based ethanol.

Research on Second Generation Biofuel: There is limited scope for first

generation ethanol in
India. However, there seem to be a large potential for second generation ethanol.

Therefore, research efforts on second generation ethanol should continue.

Public Sector Support for biodiesel: The main focus of public support should be on
biodiesel.

Following are the specific areas that require immediate attention:a)

Land use mapping and land allocation study and for formulating a strategy for the
necessarylegal, institutional, and other provisions to make wasteland available for
biodiesel production.

b)

Revision of biodiesel and oil seed prices and provision of a stable policy environment for
thebiodiesel sector to develop.

35

c)

Accelerated research program on agronomy, selection and breeding, pest and diseases
control,other management practices, and the propagation of high yielding planting
materials for plantationdevelopment.

d) Incentive packages for the private sector to mobilize private investment resources for the
development of the biodiesel sector.
e) Further studies to examine the potential synergy between Indias rural development programs
and biodiesel sector development particularly focusing on the long gestation period of biodiesel
crops.
f) Establishment of a national agency with branches in relevant states to design and implement
the above stated public support program, oversee and monitor the biodiesel industry, periodically
review the cost of production and prices, and design and recommend subsidies and taxes based
on changes in oil prices.
Bilateral and regional trade agreements have emerged as more reliable mechanisms to remove
tariffs and nontariff barriers that may affect biofuels trade than the Doha negotiations.
Standardization of trade classifications is necessary, as well as ways to certify and label biofuels
and feedstock to ensure that sustainability criteria contribute to global environmental goals,
particularly those related to climate change mitigation. Furthermore, the emergence of carbon
trading programmes related to ratification of the Kyoto Protocol may enhance the
competitiveness of biofuels, particularly ethanol.
Ethanol consumption, particularly sugarbased, results in reduced greenhouse gas emissions,
thus, earning carbon credits that can be sold through the carbon markets. Japan and the EU have
launched carbontrading programmes, and similar carbon schemes may continue to emerge

5.3

CONCLUSION:-

Sugar industry is the second largest agro-based industry in India. Sugar factories,
particularly cooperative sugar factories in Maharashtra and other states have been
instrumental in building confidence among rural people and strengthening industrial base
in rural India. In the era of globalization, sugar industry needs more competitive edge
which can be given by way of modernization, enhancing productivity, and manufacturing
36

excellent quality sugar at competitive prices. It needs quality management at every level
of activity to enhance its performance. The need of the hour is to liberalize industry from
clutches of unprofessional people. Most of the sugar units do not have byproduct
utilization plants. Projects based on bagasses and molasses should be initiated. Ethanol,
alochol , and paper projects have tremendous scope for development in India. In future,
10-15% ethanol may be allowed to be blended with petrol. Bagasses based power
generation projects installed adjacent to each sugar factory would fulfill need of power.
NABARD should provide adequate and timely refinance to these projects at concessional
interest rates. New sugar units should be set up taking into consideration sugarcane
availability. Research programme should be undertaken in area of sugarcane cultivation,
enhancing sugarcane productivity, and sugar recovery. Sugarcane prices should be fixed
on basis of sugar recovery. Attention is to be given on manufacturing quality sugar as per
international standards at competitive prices.

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