International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok

Empirics on Working Capital Management; A

Case of Indian Cement Industry
Dr. Sachin Mittal, Nishant Joshi and Kapil Shrimali

isrequired to maintain the desired level of sales. In the last one

decade, cement demand has increased by a few folds making
it difficult for the industry to predict the future demand and
thus the production levels. Raw material prices were also
changing and the government was attempting to control the
selling price. Market conditions also forcedthe industry to
change the credit norms. Due to all these dynamics Indian
cement industry has been facing loads of challenges to
manage proper working capital. The industry was also
committed to reduce the overall cost of production.
Efficientmanagement of working capital isan important
indicator of soundhealth of an organization whichwould not
only bring down the cost of financing but also support in the
overall smoothing of operations. In the light of the above
statement of problem, an attempt is made to study the working
capital trend of Indian cement industryvia a case study
analysis taking two of the biggest cement manufacturing
companies in India namely of Gujarat Ambuja Cements
Limited (GAC Ltd.) and Associated Cement Companies
Limited(ACC Ltd.).

AbstractIndian cement industry isthe second largest cement

industry in the world.The paper attempts to examine the working
capital trends on the basis of size of working capital, ratio of working
capital to total assets, fitting trend line analysis, and correlation
amongst the profit, sales and current assets. The present study opined
that in India, cement industry has low level of profitability due to
mismanagement of current assets and current liabilities. The main
objective of working capital management is to arrange the needed
funds at right time from the right sources and for the right period so
that tradeoff between liquidity and profitability may be realized. The
study unearthed that the cement industry in India arefailing to
maintain the required level of working capital.

KeywordsWorking Capital Management, Cement Industry,

Current Assets.

I. INTRODUCTION

HE cement industry isone of the main beneficiaries of the

infrastructure boom in the world. With stout demand and
tolerablesupply,cement industry is growing exceptionally fast
and it has a bright future ahead. The Indian Cement Industry
with aproduction capacity of 165 million tones is the second
largest in the world after China. The industry is subjugated by
20 companies who account for over 70% of the market.
Individually no company accounts for over 12% of the
market. The major players L&T and ACC Ltd.Which have
been quiet successful in narrowing the gap between demand
and supply. Private housing sector is the major consumer of
cement (53%)followed by the government infrastructure
sector.Similarly northern and southern region consumes
around 20%-30% cement while the central and western region
consumes only 18%-16%.Working capital management in any
manufacturing company is dependent upon various factors
like nature of business, scale of operation, production cycle,
credit policy, availability of raw materials, etc.For this
noteworthy amount of funds are required to be invested in the
form of various current.
Due to time lag between sale of goods and their actual
realization in cash, adequate amount of working capital

II. CONCEPTUAL FRAME WORK AND REVIEW OF LITERATURE

Many studies have been conducted on working capital
managementby the many researchers. The study of Sarawat
and Agrawal[8] was an attempt to analyze the working capital
management of Hetauda Cement Industries Ltd. (HCIL) and
The Udaypur Cement Industry Ltd. (UCIL) in Nepal. The
findings of the study revealed that size of working capital was
very high in HCIL as compared to UCIL. This was also
indicated that HCIL operating efficiency was better than
UCIL. The study highlighted that huge investment in public
enterprises was the one of the major problem. The study also
pointed out that reason for losses or low level of profits of the
public enterprises in Nepal was ineffective and inefficient
utilization of the current assets. Padachi[6] revealed that the
working capital of an organization should be changed over a
period of time and internal cash management played an
important role in overall working capital management. It is
also indicated that small firms should ensure a good
synchronization of its assets and liabilities. Study further
revealed that working capital had positive impact on its
profitability. Chiouet.al.[2] investigated the determinants of
working capital management. Results indicated that the debt
ratio and operating cash flow affect the companys working
capital. Study also revealed that in working capital

Dr. Sachin Mittal, Associate Professor, Prestige Institute of Management &

Research, Indore, India (Email: sachin_mittal@pimrindore.ac.in, Mob: +919302105758)
Nishant Joshi, Assistant Professor, Prestige Institute of Management &
Research, Indore, India (Email: nishant_joshi@pimrindore.ac.in , Mob:+919893301006)
Kapil Shrimal, Assistant Professor, Aishwarya Institute of Management
and IT, Udaipur, India.

212

International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok

management many companies still ignored many important

factors like business cycle, industry effect, growth of the
company, performance of the company and firm size.
Lazaridiz and Tryfonidis[5]analysed the relationship of
corporate profitability and working capital management.
Findings of the study indicated that there was statistical
significant between profitability, measured through gross
operating profit, and the cash conversion cycle. Study also
highlighted that managers can create profits for their
companies by handling correctcash conversion cycle and
keeping each different component like accounts receivables,
accounts payables, inventory to an optimum level.
Appuhami[1] investigated the factors which affect the
working capital management in manufacturing industry. He
found that capital expenditure,operating expenditure, financial
expenditure, leverage, performance and operating cash
flowwere the some other factors which affect the working
capital level.Yadavet.al. [9] analyzed the working capital
management of bulk drugs companies that were listed on the
Bombay Stock Exchange. The research findings revealed that
the listed companies adopted a conservative approach in the
management of their working capital. The findings also
suggested that working capital policy was not static overtime,
but varied with the changes in the state of the economy.Hillet.
al. [4] explained that net operating working capital captured
multiple dimensions of firms adjustments to operating and
financial conditions. Sales growth, uncertainty of sales, costly
external financing, and financial distress encourage firms to
pursued more aggressive working capital strategies. Firms
with greater internal financing capacity and superior capital
market accessed employ more conservative working capital
policies. They suggested that operating and financing
conditions should be considered when evaluating working
capital behavior, not just industry averages. Upon surveying
related literature it can be stated that working capital
management is a key issue in the cement industries and not
much has been done with respect to Indian cement industries
and a need is strongly felt not only to analyse, deduce but to
have models of successful management of working capital in
the Indian cement industry.

capital to total assets in GAC Ltd. and ACC Ltd.

IV. METHODOLOGY
A. Universe of Research:
The attempt has been made by limiting the research
universe to two companies namely Gujarat Ambuja Cements
Limited (GAC Ltd.) and Associated Cement Companies
Limited (ACC Ltd.) they are amongst the largest producers of
cement, market leaders and principle competitors. They are
the biggest cement manufacturers in terms of sales volume
and installed capacity in India
B. The Study:
This is a descriptive study based on
case study
methodologyto analyze the working capital trends of Indian
cement industries. The purpose of this research is to contribute
to a very important aspect of financial management known as
working capital management with reference to Indian cement
industry. The study analysed the relationship of working
capital with different variables like sales, total assets, and net
profit.
C. Data Collection:
Secondary data were collected to conduct the study..The
study attempted and analyzedworking capital in depth of GAC
Ltd. and ACC Ltd.GAC Ltd. and ACC Ltd. are biggest
cement manufacturersin terms of sales volume and installed
capacity in India. Since the study is based on financial data,
the main source of data is financial statements, such as
published income statements and balance sheets. Current
assets and current liabilities (including provisions) data has
been collected from the last four annual reports of companies
(from the year 2006 to2009). Net working capital has
calculated as difference between total current assets and
current liabilities. The reason for restricting the time period to
four years is, to use the latest data for the study and it has been
the last four years that cement industry conditions have been
affected.
D. Data Analysis:
The collected data have been analyzed with the help of
financial ratios like working capital to total assets and
working capital to sales. Further, data have been also analyzed
in the light of relevant statistical tools like mean, standard
deviation, coefficient of variation, correlation, multiple
correlations, simple regression, multiple regressions etc.

III. OBJECTIVES AND HYPOTHESIS

The objectives of the study areas following:
To analyse the size of working capital in Indian cement
industry.
To find the trends of working capital in Indian Cement
Industry.
To study the working capital management in Indian cement
industry, following hypothesis have been developed and
tested:H 0 1: There is no significant difference between the mean
value of the size of working capital in GAC Ltd. and ACC
Ltd.
H 0 2: There is no significant difference between the mean
values of the ratio measuring the percentage of working

V. RESULTS AND DISCUSSIONS

Based on the objective of the study, collected data were
analyzed and important findings of the study are following:
A. Size of working capital
The amount of working capital held by the companies in
terms of absolute figures is exhibited in table 1. These figures
indicated that the size of working capital in Gujarat Ambuja
cements Ltd (GAC Ltd.) varied between lowest of Rs. 238.25
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International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok

crores on 31/12/2009 to highest of Rs. 865.65 crores on

31/12/2008 showing an uneven trends.The average size of
working capital of GAC Ltd.was Rs. 499.54 crores and
coefficient of variation was 45.81%. The average growth rate
of working capital was Rs. 7.45%. Table no. 1also depicted
that, in ACC Ltd., the size of working capital varied from
highest Rs. 479.23 crores on 31/12/2006 to lowest Rs. -857.75
crores on 31/12/2009, showing a decreasing trend. The
average working capital calculated as Rs. -60.02 crores and
coefficient of variation was-821.31%. ACC Ltd. has negative
average growth rate of working capital.While comparing the
two industries, the size of working capital of GAC Ltd.was
much higher than ACC Ltd. The variation was more in ACC
Ltd.as compared to GAC Ltd. Also the rate of increase of
working capital per year in GAC Ltd.was higher than ACC
Ltd. The average progressive growth rate of GAC Ltd. (7.4)
was higher than the ACC Ltd. (-4719.54), which indicated
that operating efficiency of GAC Ltd.wasmuch better than
ACC Ltd.

rejected. Hence it implies that statistically average percentage

of working capital to total assets do not differ significantly in
both companies. The relationship between working capital and
sales can be observed even minutely by studying their linear
regression and correlation coefficients, which have been
presented in the table no. 3.
Table no. 3 evident that statistically there isno significant
correlation between working capital and sales in GAC Ltd.and
ACC Ltd. under the study period. This is indicated that
working capital was not functionally related with sales in both
companies. Further, according to regression equation from
table no. 3 in GAC Ltd., it is revealed that if sales increased
by Rs. 1 lakh then working capital would decrease by Rs.
0.026 lakh and in ACC Ltd. if sales increased by Rs. 1 lakh
then working capital would decrease by Rs. 0.503 lakh. The
main reason for such a situation may be that both the
companies make sales well in advance.
E. Trend Line and Standard Errors:
Linear logarithmic, exponential, inverse quadratic and
power trend of working capital of both the units under study
are showed in this section.
Following conclusions emerge from the trend analysis:
1. It can be depicted from Table no. 4 that the standard
error of estimate of working capital in different
trend lines of GAC Ltd. showed lowest in linear
trend line. This implied that the best trend line fit
to analysed the working capital of GAC
Ltd.islinear trend model, which is =566.01526.590X.
2. Table no. 5 highlighted that the standard error of
estimate of working capital in trend line of ACC
Ltd.also showed lowest in linear trend line. This
implies that the best trend line fit to analysed the
working capital of ACC Ltd. is also linear trend
model, which is =980.375-416.16X.
The following evaluations emerged from multiple
correlations, multiple regressions, t-test and f-test and its
results in respects to GAC Ltd. and ACC Ltd.
1. The coefficient of multiple correlations R of GAC
Ltd.is 0.78which showed a high correlation among
variables. The coefficient of multiple correlations
R of ACC Ltd. is 0.99 which showed a very high
correlation among the variables. Multiple
correlation coefficient of ACC Ltd. is near to 1,
which indicated that there is perfect correlation
among the variables.
2. The partial regression coefficient for exogenous
variable sales indicated negative and positive
relationship with dependent variable profit in GAC
Ltd.and ACC Ltd. respectively. It implies that with
the raising of sales by Rs. one crores and current
assets was held constant then there would be
decrease in profit by Rs. 0.447 crores in GAC
Ltd.and in ACC Ltd. it would be increased by Rs.
0.237 crores. Increase in sales, in general increases

B. Testing of Hypothesis:
H 0 : There is no significant difference between the mean
value of the size of working capital in GAC Ltd. and ACC
Ltd.
From the table no. 2 the calculated value oft1.78336 is not
significant. Hence null hypothesis namely There is no
significant difference between the mean value of the size of
working capital in GAC Ltd. and ACC Ltd. is not rejected. It
implies that statistically there is no significant difference
between the mean value of size of working capital in GAC
Ltd. and ACC Ltd. Reason may be that ACC Ltd. has only
negative working capital in the year 2008 and 2009.
C. Working Capital to Total Assets:
The ratio of working capital to total assets in GAC
Ltd.during the period of study showed a fluctuating trend
registering lowest value of 3.35% in 31/12/2009 and
maximum of 13.65% in 31/12/2008. The average of these
figures was 8.71% and CV was 42.9%.Ratio of working
capital to total assets in ACC Ltd. showed a declining trend
registering the highest value of 10.94% in 31/12/2006 and the
lowest value of -12.37% in31/12/2009. The average of these
figures was 0.35% and its CV was 2,426.64%during the
period. While comparing GAC Ltd.and ACC Ltd.,average
working capital to total assets in GAC LTD.was 24.88 times
higher than average working capital in ACC Ltd. The low
ratio in ACC Ltd. Cement was due to higher current liabilities.
D. Testing of Hypothesis:
H 0 : There is no significant difference between the mean
values of the ratio measuring the percentage of working
capital to total assets in GAC Ltd. and ACC Ltd.From the
table no. 2 it can be depicted that the calculated value
oft1.78336 is not significant. Therefore null hypothesis
namely There is no significant difference between the mean
values of the ratio measuring the percentage of working
capital to total assets in GAC Ltd. and ACC Ltd. is not
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International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok

the profit, which is not the case with GAC Ltd.

whereasACC Ltd. follows the rule of the more
sales and the more profit.
3. The partial regression coefficient for exogenous
variable current assets indicated positive and
negative relationship with depended variable profit
in GAC Ltd.and ACC Ltd. respectively during the
study. It implied that with the raising of current
assets by 1 crores and sales was held constant, and
then there would be increased in profit by Rs.
0.338 crores in GAC Ltd.and decrease in profit by
Rs. 0.254 croresin ACC Ltd. This relationship
follow high liquidity, high profit in GAC Ltd. and
high liquidity, low profit in ACC Ltd. So the
management must keep the current assets in such a
way that profitability and liquidity should be
maintained at ideal level.
4. GAC Ltd. and ACC Ltd., in both the companies F
value is not significant. This result implied that in
both the company statistically independent
variables were not significantly related with
dependent variable. Although, coefficient of
multiple determination of GAC Ltd.was 0.614.
This implies that 61.4% variation in profit was due
to the variation of sales and variation of current
assets and 38.6% was due to other reasons.
Similarly,
the
coefficient
of
multiple
determinations in ACC Ltd. Cement was 0.99
which implies that 99%variation in profit was due
to the variation in sales and variation of current
assets and the rest 1% was due to other reasons.

increase their capital investment in current assets to proper

manage the current ratio and the liquidity.
APPENDIX
TABLE I
SIZE OF WORKING CAPITAL AND GROWTH OF WORKING CAPITAL (WC) WITH
PROGRESSIVE BASE
SIZE OF NET WC
YEAR
GROWTH RATE OF NET WC
(Rs. in Crores)
GAC
ACC
GAC Ltd.
ACC Ltd.
Ltd.
Ltd.
31/12/2006
476.02
479.23
31/12/2007

418.24

144.54

-12.14

-69.84

31/12/2008

865.65

-6.09

106.97

-104.21

31/12/2009
X

238.25

-857.75

499.54

-60.02

-72.48
Avg.
growth rate:
7.45

45.81

-821.31

CV

-13984.56
Avg. growth
rate:
-4719.54

TABLE II
MEAN VALUES, STANDARD DEVIATION AND T VALUES OF SIZE OF WORKING
CAPITAL AND MEASURING THE PERCENTAGE OF WORKING CAPITAL TO TOTAL
ASSETS OF GAC LTD. AND ACC LTD. DURING THE STUDY PERIOD
GAC Ltd.
ACC Ltd.
td.
value
f.
X

Size
Working
Capital

of

Working
Capital
to
Total Assets

1770.93

264.24

-60.02

569.18

1.78**

8.71

4.3

0.35

9.6

1.58**

VI. CONCLUSIONS
*Significant at 5% ;** NotSignificant at 5%

The result of the study showed that in both the companies

there is no significant relationship between working capital
and total assets. There is also no significant relationship
between working capital and sales. Working capital in GAC
Ltd.is highly fluctuating,whereasthe sales and total assets are
increasing. This is indicated that GAC Ltd. has high
concentration on long term investment and less focus on
current asset requirements.The total assets and sales of ACC
Ltd.are increasing while working capital is constantly going
down. The average decline is unprecedented. The profit
increase indicated that lack of working capital did not have
any negative impact on the performance of ACC Ltd.
Both the companies might be using their reserves and
surpluses to meet the current needs.If working capital is
deviating from the optimum level, it may result in heavy
losses in future. It is recommended that Indian cement
industry should manage the working capital in the line of sales
and total assets. The sales prices of cement is highly
fluctuating, so the companies should estimate the future prices
and should manage their operating cycle to ensure proper
management of working capital.On the basis of the above
results,this is also suggested that cement industries needs to

TABLE III
REGRESSION EQUATION, COEFFICIENTS OF CORRELATION WITH THEIR TVALUES AND COEFFICIENTS OF DETERMINATION OF WORKING CAPITAL (Y)
AND SALES (X) OF GAC LTD. AND ACC LTD. DURING THE STUDY PERIOD

Companies

Regression Equation

tvalue

GAC Ltd.

=654.514- 0.0262X

0.105

0.011

0.621**

ACC Ltd.

=2709.8460.5033639X

0.978

0.956

6.336**

*Significant at 5% ;** NotSignificant at 5%

215

International Conference on Humanities, Economics and Geography (ICHEG'2012) March 17-18, 2012 Bangkok
TABLE IV
FITTING THE TREND LINE AND STANDARD ERROR OF ESTIMATED BY LINEAR,
LOGARITHMIC, & INVERSE, TREND OF WORKING CAPITAL OF GAC LTD.

B. Result (ACC Ltd.)

Multiple Regression Equation Y on X and X
The required multiple regression equation:
=915.165 + 0.237X - 0.524X
Where, Y= Profit, X = Sales, X = Current Assets
Multiple correlation coefficient R=0.998
Coefficient of Multiple Determination R=0.996
Variables in Equation

DURING STUDY PERIOD

Year (X)

Working
Capital
(Y)

Linear
Trend
(Y- )2

31/12/06
31/12/07
31/12/08

476.02
418.24

4020.19
8948.21
143948.1
5

Logarith
mic
Trend
(Y- )2
416.89
3982.11
159520.3
6

49020.1
=566.01
526.590X
226.9

45328.96
=511.53
215.094X
228.7

865.65
31/12/09

238.25

Trend
Equatio
n ()
standar
d error
of
estimate

Inverse Trend
(Y- )2

168.16
2374.12
176995.22

Variables
X

34102.6
=511.01122.023X

231.1

[2]

[3]

DURING STUDY PERIOD

31/12/06
31/12/07
31/12/08
31/12/09
Trend
Equation
()
standard
error of
estimate

Linear
Trend
(Y- )2

Logarithm
ic Trend
(Y- )2

Inverse
Trend
(Y- )2

564.215
148.055
-268.105
-684.265
=980.38416.16X

-231.512
-1066.092
-1900.672
-2735.252
=603.07834.58X

591.15
1950.12
3309.09
4668.06
=767.82+1
358.97X

[5]

162.77

1507.08

3346.55

[7]

[4]

[6]

[8]

TABLE VI
MULTIPLE CORRELATIONS, MULTIPLE REGRESSION EQUATION, F-TEST AND
T-TEST OF PROFIT(Y), SALES (X) AND CURRENT ASSETS (X) OF GAC LTD.
AND ACC LTD. (RS. IN CRORES)
GAC Ltd.
ACC Ltd.
Year
Profit Sales
CA
Profit Sales
CA
31/12/06
31/12/07
31/12/08
31/12/09

983
1,769
1,402
1,218

6,274
5,704
6,234
7,076

1177
1587
2339
1,979

1,231
1,438
1,212
1,606

5,803
7,007
7,308
8,027

[9]

2006
2203
2735
2294

A. Result (GAC Ltd.)

Multiple Regression Equation Y on X and X
The required multiple regression equation:
=3570.71 - 447X + 0.338X
Where, Y= Profit, X = Sales, X = Current Assets
Multiple correlation coefficient R= 0.78
Coefficient of Multiple Determination R= 0.61
Variables in Equation
Variables

SEB

|t|-value

-0.447

0.381

-1.173**

0.338

0.430

0.785**

|t|-value
15.321**

0.047

-11.260**

REFERENCES
[1]

Workin
g
Capital
(Y)
479.23
144.54
-6.09
-857.75

-0.524

SEB
.0015

*Significant at 5% ;** NotSignificant at 5%

TABLE V
FITTING THE TREND LINE AND STANDARD ERROR OF ESTIMATED BY LINEAR,
LOGARITHMIC, & INVERSE, TREND OF WORKING CAPITAL OF ACC LTD.
Year (X)

B
0.237

*Significant at 5% ;** NotSignificant at 5%

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