CHAPTER-I

INTRODUCTION

1.1 MEANING OF WORKING CAPITAL

Working capital (abbreviated WC) is a financial metric which represents operating liquidity
available to a business, organization or other entity, including governmental entity. Along
with fixed assets such as plant and equipment, working capital is considered a part of
operating capital.
Net working capital is calculated as current assets minus current liabilities. It is a derivation
of working capital that is commonly used in valuation techniques such as DCFs (Discounted
cash flows).
If current assets are less than current liabilities, an entity has a working capital deficiency,
also called a working capital deficit. A company can be endowed with assets and profitability
but short of liquidity if its assets cannot readily be converted into cash. Positive working
capital is required to ensure that a firm is able to continue its operations and that it has
sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses.
The management of working capital involves managing inventories, accounts receivable and
payable, and cash.

Current assets and current liabilities include three accounts which are of special
importance. These accounts represent the areas of the business where managers have the most
direct impact:
Accounts receivable (current asset)
inventory (current assets), and
accounts payable (current liability)

The current portion of debt (payable within 12 months) is critical, because it represents a
short-term claim to current assets and is often secured by long term assets. Common types of
short-term debt are bank loans and lines of credit. An increase in working capital indicates
that the business has either increased current assets (that it has increased its receivables or
other current assets) or has decreased current liabilities, for example has paid off some short-
term creditors.
Implications on M&A: The common commercial definition of working capital for the
purpose of a working capital adjustment in an M&A transaction (i.e. for a working capital
adjustment mechanism in a sale and purchase agreement) is equal to: 2 Current Assets
Current Liabilities excluding deferred tax assets/liabilities, excess cash, surplus assets and/or
deposit balances.
Cash balance items often attract a one-for-one purchase price adjustment.

Working capital management

Decisions relating to working capital and short term financing are referred to as working
capital management. These involve managing the relationship between a firm's short-term
assets and its short-term liabilities. The goal of working capital management is to ensure that
the firm is able to continue its operations and that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational expenses.
A popular measure of working capital management is the cash conversion cycle, that is, the
time span between the expenditure for the purchases of raw materials and the collection of
sales of finished goods for example, found that the longer the time lag, the larger the
investment in working capital. A long cash conversion cycle might increase profitability
because it leads to higher sales. However, corporate profitability might decrease with the cash
conversion cycle, if the costs of higher investment in working capital rise faster than the
benefits of holding more inventories and/or granting more trade credit to customers.
For many manufacturing firms the current assets account for over half of their total assets.
The management of working capital may have both negative and positive impact of the
firms profitability, which in turn, has negative and positive impact on the shareholders
wealth. The present study seeks to explore in detail these effects. Firms may have an optimal
level of working capital that maximizes their value. Large inventory and generous trade credit
policy may lead to high sales. The larger inventory also reduces the risk of a stock-out. Trade
credit may stimulate sales because it allows a firm to access product quality before paying .
Another component of working capital is accounts payables. It is believed that delaying
payment of accounts payable to suppliers allows firms to access the quality of bough products
and can be expensive if a firm is offered a discount for the early payment. By the same token,
uncollected accounts receivables can lead to cash inflow problems for the firm.
By definition, working capital management entails short term decisions - generally, relating
to the next one year period - which is "reversible". These decisions are therefore not taken on
3
the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be
based on cash flows and / or profitability.
One measure of cash flow is provided by the cash conversion cycle - the net number of days
from the outlay of cash for raw material to receiving payment from the customer. As a
management tool, this metric makes explicit the inter-relatedness of decisions relating to
inventories, accounts receivable and payable, and cash. Because this number effectively
corresponds to the time that the firm's cash is tied up in operations and unavailable for other
activities, management generally aims at a low net count.
In this context, the most useful measure of profitability is Return on capital (ROC). The
result is shown as a percentage, determined by dividing relevant income for the 12 months by
capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm
value is enhanced when, and if, the return on capital, which results from working capital
management, exceeds the cost of capital, which results from capital investment decisions as
above. ROC measures are therefore useful as a management tool, in that they link short-term
policy with long-term decision making. See Economic value added (EVA).
Credit policy of the firm: Another factor affecting working capital management is credit
policy of the firm. It includes buying of raw material and selling of finished goods either in
cash or on credit. This affects the cash conversion cycle.

Management of working capital

Guided by the above criteria, management will use a combination of policies and techniques
for the management of working capital. The policies aim at managing the current assets
(generally cash and cash equivalents, inventories and debtors) and the short term financing,
such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to
day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted
production but reduces the investment in raw materials - and minimizes reordering costs - and
hence increases cash flow. Besides this, the lead times in production should be lowered to
reduce Work in Process (WIP) and similarly, the Finished Goods should be kept on as low
level as possible to avoid over production - see Supply chain management; Just In Time
(JIT); Economic order quantity (EOQ); Economic quantity 4
 Debtors management. Identify the appropriate credit policy, i.e. credit terms which will
attract customers, such that any impact on cash flows and the cash conversion cycle will be
offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and
allowances.

Short term financing. Identify the appropriate source of financing, given the cash
conversion cycle: the inventory is ideally financed by credit granted by the supplier; however,
it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash"
through "factoring".

1.2 OBJECTIVE
To study and analyse working capital management at Reliance Infrastructure Ltd. which
includes
Inventory management

Receivable management

Cash management

The aim is to learn how to manage working capital needs of the organization and to learn the
different ways through which theoretical learning is applied practically in the organization.
The project is aimed to learn and gain knowledge of the day to day working of the
organization as to how does the different decision are taken and on what basis. The project
will help in gaining the knowledge of different steps of raising the short term funds and their
effective management so as to ensure adequate availability of funds. The various analyses
will help the management to assess the efficiency of the working capital management of the
company.
1.3 SIGNIFICANCE
Financial Analysis is the process of identifying the financial strengths and weaknesses of the
firm by properly establishing relationships between the items of the balance sheet and the
profit & loss account. Financial analysis can be undertaken by management of the firm, viz.
Owners, creditors, investors and others. Ratio analysis is a powerful tool of financial analysis.
A ratio is defined as the indicated quotient of two mathematical expressions and as the
relationship between two or more things.
Ratios help to summarise large quantities of financial data and to make qualitative judgement
about the firms financial performance. WORKING CAPITAL MANAGEMENT deals with
the management of current assets. The management of current assets is similar to that of fixed
assets in the sense that in both cases firm analyses their effect on their return and risk profile.
The management of fixed assets and current assets, however, differ in three aspects. First, in
managing fixed assets, time is a very important factor; consequently, discounting and
compounding techniques play a significant role in capital budgeting. Second, the large
holding of current assets, especially cash, strengthens the firm's liquidity position (and
reduces risk). Third, levels of fixed as well as current assets depend upon expected sales, but
it is only current assets that can be adjusted with sales fluctuations in the short run.
Thus with such importance attached, a due diligence should be given to proper management
of the working capital.
1.4 CONCEPTUALIZATION
There are two concepts of working capital- gross and net.
Gross Working Capital refers to the firm's investment in current assets. Current assets are
the assets which can be converted into cash within an accounting year and include cash,
short-term securities, debtors, (accounts receivable or book debts) bills receivables and stock
(inventory).
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 and include creditors (accounts payable), bills payable, and
outstanding expenses. Net working capital can be positive or negative. A positive net working
capital will arise when current assets exceed current liabilities.
Also, negative net working capital will arise when current liabilities exceed current assets.

1.5 COMPANY PROFILE

1.5.1 The Vision
To be amongst the most admired and most trusted integrated utility companies in the world,
delivering reliable and quality products and services to all customers at competitive costs,
with Inter-national standards of customer care thereby creating superior value for all
stakeholders.
To set new benchmarks in standards of corporate performance and governance
through the pursuit of operational and financial excellence, responsible citizenship, and
profitable growth.

1.5.2 The Mission Excellence in Infrastructure

To attain global best practices and become a world-class utility.
To provide uninterrupted, affordable, quality, reliable and clean power to millions of
customers.
To achieve excellence in service, quality, reliability, safety and customer care.
To earn the trust and confidence of all customers and stakeholders and by exceeding their
7 expectations make the company a respected household name.
To work with vigour, dedication and innovation, towards achieving the ultimate goal of
total customer satisfaction.
To consistently achieve high growth with the highest levels of productivity.
To be a technology driven, efficient and financially sound organization.
To be a responsible corporate citizen, nurturing human values and concern for society, the
environment and above all, people.
To contribute towards community development and nation building.
To promote a work culture that fosters individual growth, team spirit and creativity to
overcome challenges and attain goals.
To encourage ideas, talent and value systems.
 To uphold the guiding principles of trust, integrity and transparency in all aspects of
interactions and dealings.

1.5.3 Statement of Values

RIL believes that any business conduct can be ethical only when it rests on the nine core
values of Honesty, Integrity, Respect, Fairness, Purposefulness, Trust, Responsibility,
Citizenship and Caring. These values are not to be lost sight of by anyone at RELIANCE
INFRASTRCUTURE LIMITED. Under any circumstances irrespective of the goals that are
intended to be achieved.
To them, means are as important as the ends.

1.5.4 Background
RInfra, formerly known as Reliance Energy Ltd, with a market cap of more than $3 billion,
was incorporated in 1929 and ranks amongst top performing Indian private sector companies
in the country. The company operates in three business segments: Infrastructure, Engineering,
Procurement and Contracts (EPC) and Power. The company is the largest private sector
infrastructure developer on ownership basis and is having presence in all high growth sectors
viz; Roads, Metro, Sea Link, Cement and Airports. The company is having 11 8
roads projects worth `120 billion under its portfolio. Further, it is also having 3 Metro
projects worth `170 billion, 1 sea link project of `46 billion, 2 cement projects in Maharashtra
and Madhya Pradesh worth `47 billion and 5 airports projects worth `5 billion. Reliance
Infrastructure has also emerged as the leading player in India in the Engineering,
Procurement and Construction (EPC) segment of the power sector. RInfra is having a healthy
EPC order book of `212 billion spread across power, Roads and Transmission projects. In
addition to this, RInfra has also emerged as the largest private sector player in the utility
sector. Currently, it is having power generation capacity of 941 MW and 37,000 MW through
Reliance Power. It is having the power distribution license in Mumbai and Delhi serving over
5.4 million customers and distributes over 5,000 MW of power. Under its Transmission
segment, RInfra is having 5 projects worth `66 billion.
RInfra also owns 38% stake in Reliance Power (R Power) with an aggregate investment of
`17.2 billion. R Power is likely to develop all future power generation assets in India and
overseas with having 600 MW of operational capacity and over 20,000 MW under execution.
Further, the company is targeting 5,000 MW of operating capacity by 2012. R Power is also
having largest coal resources of ~ 4 billion tonnes.

1.6 BUSINESS OVERVIEW

Figure 1Business overview of Reliance Infrastructure Ltd

Reliance infrastructure RPower(38%)

Infrastructure (100%) EPC(100%) POWER(100%)
Roads Metros Airports Sea link Cement
Trading Distribution Transmission Generation 9
1.7 SUBSIDIARY & ASSOCIATE COMPANIES
BSES Kerala Power Ltd.
BSES Rajdhani Power Ltd.
BSES Yamuna Power Ltd.
Reliance Energy Trading Ltd.
Reliance Energy Transmission Ltd.
Utility Powertech Ltd.
North Eastern electricity Supply Company of Orissa Ltd. (NESCO)
Western Electricity Supply Company of Orissa Ltd. (WESCO)
Southern Electricity Supply Company of Orissa Ltd. (SOUTHCO)
Reliance Natural Resource Ltd.
Reliance Power ltd

1.8 BUSINESS PROFILE

1.8.1 Generation:
As the integrated power utility RIL has setup; a full-fledged generation division having
proven expertise in designing, engineering, erection, installation, commissioning, operations
and maintenance of power projects. The division implements project plans for in house power
projects and supports ventures undertaken by other affiliate companies. The division is fully
integrated and has in house capabilities to address every aspect of power projects including:
Mechanical
Civil
Electrical
Instrumentation
Environmental
The division also provides engineering consultancy to external agencies and projects.
The 941 MW Generation capacity of the Division comes from five projects:
Dahanu TPS the 2x250 MW multi fuel based thermal power station at Dahanu near
Mumbai.
8 MW Wind Farm Project at Jogimatti in the district of Chitradurga in Karnataka.
BSES Kerala Limited: The 165 MW combined cycle power station at Kochi,
Kerala.
BSES Andhra Power Limited: The 220 MW combined cycle power plant at
Samalkot in Andhra Pradesh.
Goa Power Station: The 48 MW naphtha based combined cycle power plant at Goa
Reliance Infrastructure distributes more than 36 billion units of electricity to over 30 million
consumers across different parts of the country including Mumbai and Delhi in an area that
spans over 1, 24,300 sq. kms. It also generates 941 MW of electricity, from its power stations
located in Maharashtra, Andhra Pradesh, Kerala, Karnataka and Goa. Reliance Infrastructure
has emerged as the leading player in India in the Engineering, Procurement and Construction
(EPC) segment of the power sector.
In the last few years, Reliance Infrastructure has expanded its foot-print much beyond the
power sector. Currently, Reliance Infrastructure group is engaged in the implementation of
projects not only in the fields of generation, transmission, distribution and trading of power
but also in other key infrastructural areas such as highways, roads, bridges, metro rail and
other mass rapid transit systems, special economic zones, real estate, airports, cement, etc

1.8.2 Transmission:
The Transmission department has successfully implemented and operated a 2 x 220 kV
transmission system. It has been responsible for the laying of the double circuit transmission
system from Dahanu to Mumbai. It has planned, constructed and commissioned two modern
200kV receiving stations having a capacity of 300 MVA each at Ghodbunder, & Versova . It
has also commissioned a 400 MVA station at Aarey for receiving power from the Dahanu
plant. It is one of the select few electricity companies to commission a network of 4 circuit
transmission towers for economical and efficient power transmission. The Engineering cell of
the department coordinates the engineering activities of the company's transmission network.
The Transmission Division is an intermediary between Generation & Distribution Division
and is responsible for transmission of power at 220 kV from DTPS to the company's area of
11 supply in Mumbai Suburbs. Reliance Infra is presently working in the development of
five power transmission projects across the North-western part of the country. Of which, the
WRSS (Western Region System Strengthening) project is likely to see completion by the end
of 2012, providing higher revenue visibility for FY13. Meanwhile, the six EHV stations
commissioned in Mumbai also ensure hassle free power transmission in the city
supply in Mumbai Suburbs. RInfra is presently working in the development of five power
transmission projects across the North-western part of the country.
1.8.3 Distribution:
Distribution is the key to efficient and reliable power supply. Seven decades of experience
and continuous investment in modernizing its distribution infrastructure have helped the
company achieve the enviable distinction of operating its network with 99.93% reliability!
The efforts made towards achieving higher levels of efficiency have reduced distribution
losses to 12.01% - The lowest in the country!
Reliance Energy Limited's Mumbai operations cover a population of 9.0 million within an
area of about 384 sq. kilometers .Reliance Infrastructures Limited continually upgrades its
distribution network. This is accomplished through a process of decentralized operation in
supply management to maintain very high on-line reliability
Fig 2: RELIANCE Presence in Distribution
1.8.4 Infrastructure
Road
It is the largest developer of road and highway projects for the National Highways Authority
of India (NHAI) under the build, own, transfer (BOT) scheme. With an investment involving
Rs 3150 crores, the company is developing 5 major road projects in Tamil Nadu totaling over
400 kms of length. Financial closure of all the projects is done and the projects are currently
under construction.
Urban Infrastructure
It is also the countrys first and only private sector builder and operator for Metro System. It
is already into construction of the first line of Mumbais Metro system stretching 12 kms
from Versova to Ghatkopar.
Specialty Real Estate
It is also the countrys first and only private sector builder to build India s first 100 storied
building, a trade tower and business district in 80 acres of land in Hyderabad, The total
investment for this project is Rs 6,500 crores.
Special Economic Zones
It is also developing over 180 mn sq ft of SEZ for IT/ITES, retail hospitality in Mumbai and
Noida with an investment worth Rs 31,000 crores.
1.8.5 EPC (Engineering, Procurement and Construction) Division
Reliance Energy has significant presence in the field of execution of the Power projects on
EPC basis with a strong track record of the execution and commissioning of projects on time.
Reliance Energy has received wide acclaim for the initiatives in corporate governance. These
awards and recognition's greatly motivates and envisages the Reliance Energy team to set
fresh benchmarks in corporate governance, particularly in the Indian Power Sector. Reliance
Energy with its affiliates and sister companies in the Reliance group, own and operate over
2,000 MW of Generating capacities in the country. These comprise conventional thermal
plants; gas turbine based combined cycle power plants, Cogeneration plants and wind electric
generators. Most of its Projects have been executed by Reliance Energy through its EPC
division. The EPC division of Reliance Energy was set up in 1966 and was undertaking 13
engineering, procurement and construction contracts on a turnkey basis and other value added
services for major public and private sector projects both in India and Abroad. The Division
has to-date undertaken the total engineering, supply of electrical and mechanical equipment,
installation and commissioning services and civil works for the following range of projects:
thermal, hydro, Co-generation and gas based power generating stations;
400/132 KV transmission lines and switch yards;
overhead and underground electrical networks;
industrial electrification works for petrochemicals, fertilizers, steel, cement plants,
refineries, ports and hotels;
pre-molded accessories for extra high voltage electrical cables;
Renovation and Modernization of Delhi distribution network

Experience and Achievements:

EPC division has undertaken and successfully commissioned the following major projects:
Its first ever IPP, 2 x 250 MW Coal based Thermal Power Station at Dahanu, Maharashtra

Reliance Energy Limited-Samalkot Power Station: 220 MW Dual Fuel based (Natural gas
& Liquid Fuel) Combined Cycle Power Plant at Samalkot, Andhra Pradesh. The Power Plant
is already operational and supplying power to the State Grid of Andhra Pradesh.
 165 MW liquid-fuels based combined cycle power project for its subsidiary, Reliance
Energy Limited - Kochi Power Station at Kochi in Kerala with an aero-derivative unit of 40
MW along GE's LM6000 module, completed on 15 June 2001.

106 MW Combined Cycle Power Plant of Gujarat State Electricity Corporation Ltd. at
Dhuvaran, Gujarat 15
24 MW Bagasse based Co-generation Power Plant for Godavari Sugar Mills Limited at
Sameerwadi, Karnataka.
20 MW Diesel based D.G.Sets for Surya Chakra Power Ltd. at Islands of Andaman and
Nicobar.
12.5 MW Lignite Based Power Project for Grasim Industries Limited at Ariyalur, Tamil
Nadu
10.5 MW (5 x 2 MW + 1 x 0.5 MW) Diesel based captive power project for IT-Park for
TIDEL- Chennai.
7.5 MW Thermal Power Plant for Monnet Power Ltd. at Raipur, Madhya Pradesh.
3 x 2.5 M DG based Power Plant for National Institute of Biological, Noida.
16
5 MW Bagasse based Thermal Power Plant for Global Energy Ltd. Belgundi, Karnataka,
3 MW Captive Power Project for Alok Industries Limited at Vapi, Gujarat.
2.5 MW D.G. set based Captive Power Plant for ITC, Bangalore.
2x250 MW Tau Devilal Thermal Power Station for Haryana Power Generation Corporation
Haryana- Balance of Plant, Civil and Structural works.
Renovation and Modernization of Delhi Distribution System 17.
1.9 ORGANIZATIONAL STRUCTURE:
FIGURE 3: RILS TOP MANAGEMENT CONSISTS OF THE UNDER MENTIONED
EMPLOYEES

1.10 CURRENT SCENARIO

RInfra, the infrastructure development arm of the Anil Ambani-led Reliance Group reported a
66.3% growth in its net sales on consolidated basis to `61,302.5 million in Q3FY 12, driven by
higher sales from its engineering and construction (EPC) business and electrical segment. The
EPC business clocked revenue of `29,405.9 million, up 177.1% on YoY basis, as it largely
undertakes construction of in-house projects and is benefiting from a large number of projects
that are under construction. On contrary, operating profit margin (OPM) depreciated by 220bps to
13.0% on YoY basis, due to 193.6% rise in material cost & sub contract charges, which in turn
capped the operating profit growth of the company to 42.5% YoY at `795.5 million. Owed to
109.5% rise in interest charges and 13% rise in taxation charges, the PAT before share of profit
from associate and minority interest reported a decline of 8% in Q3FY 12 on YoY basis at
`3,186.5 million as against `3,468.8 million in Q3FY 11.. As a result, the NPM depreciated by
410bps YoY to 6.5%. RInfras EPC business reported income of `29,405.9 million in Q3FY 12,
up 177.1% YoY driven by better execution in RPower projects. As on December 2011, EPC
segment had an order book position of `215,550 million. The order book comprises of 6 power
projects of over 9,900 MW, one transmission 18