Comparative Analysis of Working Capital Management
of Public and Private Sector of Steel Industry in India
Lakshay Kataria 11067234080 ABSTRACT Working Capital Management has its impact on liquidity as well profitability. The impact on effectiveness and profitability of working capital is tried to be found out by analyzing various working capital ratios. For this study, data from 2009 to 2013 of two major companies in public and private sector of steel industry i.e., Steel Authority of India and Jindal Steel and Power Limited., is taken. It is also tried to find out correlation of working capital with their liquidity, efficiency and profitability. Multiple regression tests confirm a lower degree of association between the working capital management and profitability.
OBJECTIVE OF THE STUDY The main objective of the present study is to examine the overall efficiency of the management of working capital in terms of short- term liquidity in selected private sector steel companies. More specifically it seeks to dwells upon mainly the following issues: To compare the performance of working capital between Jindal Steel and Power Limited and Steel Authority of India Ltd. To compare the liquidity position of JSPL and SAIL and areas of weaknesses, if any. To search the liquidity profitability relationship of both the companies and compare with each other. To give some suggestions and recommendations for improvement of the liquidity position.
HYPOTHESES OF THE STUDY The study has pursued to test the following null hypothesis with reference to steel industry in India: 1. H0: There is no relationship between working capital management and profitability. H1 There is a relationship between working capital management and profitability 2. H0: There is no significant impact of working capital cycle on profitability. H1: There is a significant impact of working capital cycle on profitability 3. H0: Liquidity position has no impact on profitability. H1: Liquidity position has a significant impact on profitability.
Method of Data Collection
For the purpose of study only secondary data have been used. The study is based on the secondary data obtained from the Audited balance sheets and profit & loss accounts Annual reports of the respective companies. Facts, figures and findings advanced in similar earlier studies and the government publications are also used to supplement the secondary data
RESEARCH METHODOLOGY Sample 2 Steel Manufacturing firms. Time period 5 years viz. 2009-2013 Data Sources Audited Balance sheets, Annual Reports, Publications Data collected Facts and figures required for calculation of Working Capital Ratios, Working Capital Cycle and Profitability ratios like Net Profit Margin and Return on Capital employed. Research Methods For calculating Average Ratios of Industry , weighted mean of ratios of 8 major steel companies have been taken. Weights have been assigned on the basis of Market Capitalization of these companies Statistical Techniques A.M., S.D., C.V., multiple correlation and multiple regression analysis, co-efficient of determination (R2) and linear regression equations. FINDINGS 0 0.5 1 1.5 2 2.5 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 JSPL INDUSTRY AVERAGE SAIL 1. Current Ratio 2. Quick Ratio 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 2008-2009 2009-2010 2010-2011 2011-2012 2012-2013 JSPL Industry Average SAIL 3. Inventory Turnover Ratio 0 1 2 3 4 5 6 7 8 9 10 Inventory Turnover Ratio SAIL JSPL 2009 2010 2011 2012 2013 C.V. JSPL = 35.34 S.D. JSPL = 2.12 C.V. SAIL = 31.76 S.D. SAIL = 1.47 4. Debtors Turnover Ratio 14.43 12.46 11.11 10.39 9.71 22.62 14.49 14.09 16.24 12.83 0 5 10 15 20 25 Debtors Turnover Ratio SAIL JSPL 2009 2010 2011 2012 2013 S.D. SAIL = 1.872351
S.D. JSPL = 3.867962
5. Debt Collection Period 24.95 28.89 32.4 34.65 37.08 15.92 24.84 25.55 22.17 28.06 0 5 10 15 20 25 30 35 40 Debt Collection Period SAIL JSPL 2009 2010 2011 2012 2013 S.D. SAIL = 4.783809 C.V. SAIL = 15.14151 S.D. JSPL = 4.632296 C.V. JSPL = 19.87428 6. Working Capital Ratios -10 0 10 20 30 40 50 60 70 80 90 Current Ratio Quick Ratio WC TO SALES RecievableDays InventoryDays PayableDays Inventory Ratio Debtor Ratio Working Capital Ratios SAIL JSPL 7. Correlation Analysis JSPL
SAIL
A) Among the Components of Working Capital Inventory Days Receivable days Debtor Turnover -0.95* -0.908* Receivab le days WC to Sales Inventory Turnover Debtor Turnover Inventory Days .932* .911* -.893* -.903* B) Components of Working Capital with Profitability (Net Profit Margin) JSPL No statistically significant correlation of working capital ratios with Net Profit Margin was found this case. SAIL
Inventory Turnover Ratio Current Ratio Quick Ratio NPM .980* .930* .927* 8. Multiple regression analysis Formula for the purpose of research was: Profitability = a + b1Xreceivable days + b2Xpayable days + b3Xinventory days SAIL
JSPL
A) Working Capital Cycle and Profitability (Net Profit Margin) R R Square Adjusted R Square Sig. .992 .984 .937 .160 R R Square Adjusted R Square Sig. .836 .699 -.205 .662 B) Working Capital Ratios and Liquidity (Return on Capital Employed) In this study, current ratio, liquid ratio, have been taken as the explanatory variables and return on capital employed has been used as the dependent variable. SAIL
R R Square Adjusted R Square Sig. .855 .731 .462 .029 Unstandardized Coefficients Standardized Coefficiencts Sig (Constant) -7.188 .554 Current Ratio 16.039 .866 .264 Quick Ratio -.268 -.014 .982 JSPL
ROCE= 9.018+ 32.539 CR 20.600 QR.
R R Square Adjusted R Square Sig .992 .985 .970 .038 Unstandardize d Coefficients Standardized Coefficients Sig (Constant) 9.018 .015 Current Ratio 32.539 1.005 0.008 Quick Ratio -20.600 -.643 0.020 Conclusions According to the observation of Working Capital Ratios, JSPL is better off if Debtor turnover ratios, Inventory turnover ratio, Inventory days, and Receivable days are considered whereas SAIL is better in Payable days, Working capital to sales ratio, quick ratio and current ratio observations. These indicate better operating policies in JSPL while SAIL will be able to meet its short term obligations in a better way. In our study of Multiple Regression Analysis to determine the relationship between Working Capital Cycle and Profitabilty i.e. Net Profit Margin, none of the tests in any of the cases of companies were statistically significant to determine a relationship. the impact of liquidity on profitability i.e. Return on Capital Employed in this case, we observed that in case of SAIL the proportion of Return on Capital employed explained by current and quick ratio is 73.1% but t-statistics tests show that there is no significant impact of liquidity ratios on profitability. In the case of JSPL, the proportion of ROCE explained by quick ratio and current ratio is 98.5% and we also observe that there is a significant impact of working capital ratios on profitability i.e. ROCE in this case. The linear regression equation in the case of JSPL is ROCE= 9.018 + 32.539 CR 20.6 QR
LIMITATIONS This study suffers from certain limitations which are mentioned as follows: This comparative study has been based on one private sector steel company and one public sector steel company as sample but not considered all private sector and public sector operating units. Hence it will reflect only a partial view of the overall liquidity position of private sector and public sector steel companies. Study is solely based on secondary data and published financial statements of the selected company, which may leave some grounds of error. This study is related with financial variables and some of the financial variables are not considered due to unavailability of data. The different agencies which are providing the information on Iron & Steel sector units is contradictory therefore it is very difficult to find authenticity. The financial performance covering a large period say 20 years or 30 years can give a much clear picture of management practices of financial performance. Our study covering a period of 5 years can touch only a part of the problem. The main source of information is annual reports. They represent financial information/position on particular date. What happened between such two dates cannot easily be presumed or predicated.