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REVEIEW OF LITERATURE FOR WORKING CAPITAL

Working capital policy refers to the firm's policies regarding :

1) Target levels for each category of current operating assets and liabilities, and

2) How current assets will be financed. Generally good working capital policy (i.e. under
conditions of certainty) is considered to be one in which holdings of cash, securities,
inventories, fixed assets, and accounts payables are minimized.

The level of accounts receivables should be used as a means of stimulating sales and
other income. Previous literature on working capital management has found a negative
association, overall, between level of working capital and operating performance as
measured by operating returns and operating margins (Peterson and Rajan, 1997). Under
conditions of certainty (i.e. sales, costs, lead times, payment periods, and so on, are
known), firms have little reason to hold more working capital than a minimum level.
Larger amounts would increase the level of operating assets, increase the need for
external funding, resulting in lower return on assets and a lower return on equity, without
any increase in profit.

However the picture changes when uncertainty (i.e. uncertain growth) is introduced
(Brigham and Houston, 2000). Larger amounts of cash, securities, accounts receivables,
marketable securities, inventories, and fixed assets will be needed to support increased
sales Required levels will be based on expected sales levels and expected order lead
times. Additional holdings may be needed to enable the firm to deal with departures from
the expected values. Further, firms will also attempt to increase their accounts payable
balances as a means of financing increased levels of current operating assets. Firms
which are in high growth stages will face the challenge of maintaining the necessary level
of operating assets to support subsequent growth, while at the same time attempting to
maintain adequate performance indicators.
From the above reviews it can be concluded that many researches have
been conducted before relating to the concept of working capital but no
researches have been conducted to study the working capital
management of Reliance Industries Limited. This gap has been fulfilled
by this research report which gives an practical insight into the concept
of working capital management.

LITERATURE REVIEW FOR TELECOM INDUSTRY

Cygnus Business Consulting & Research Pvt. Ltd. (2008), in its “Performance
Analysis of Companies (April-June 2008)” has analyzed the Indian telecom industry in
the awake of recent global recession and its overall impact on the Indian economy. With
almost 5-6million subscribers are being added every month, and the country is witnessing
wild momentum in the telecom industry, the Indian telecom industry is expected to
maintain the same growth trajectory.

• Internet service providers in India, Rao (2000), provide a broad view of the
role of an Internet service provider (ISP) in a nascent market of India. Building local
content, foreknowledge of new Internet technologies, connecting issues,
competitiveness, etc. would help in their sustainability.

• The role of technology in the emergence of the information society in India,

Singh (2005), describes the role that information and communication technologies
are playing for Indian society to educate them formally or informally which is
ultimately helping India to emerge as an information society.

• T.H. Chowdary (1999) discusses how Telecom reform, or demonopolization, in

India has been bungled. Shaped by legislation dating back to the colonial era and post
Second World War socialist policies, by the mid-1980s India realized that its poor
telecommunications infrastructure and service needed reform. At the heart of the
problem lay the monopoly by the government’s Department of Telecommunications
(DOT) in equipment, networks and services. The National Telecom Policy 1994 spelt
out decent objectives for reform but tragically its implementation was entrusted to the
DOT. This created an untenable situation in which the DOT became policymaker,
licenser, regulator, operator and also arbitrator in disputes between itself and licensed
competitors. He discusses the question: ‘Why did India get it so wrong? and What
India should do now?

• Thomas (2007), in his article describes the contribution made by

telecommunications in India by the state and civil society to public service, this
article aims to identify the state’s initial reluctance to recognize telecommunications
provision as a basic need as against the robust tradition of public service aligned to
the postal services and finds hope in the renewal of public service
telecommunications via the Right to Information movement. The article follows the
methodology of studying the history of telecommunications approach that is
conversant with the political economy tradition. It uses archival sources, personal
correspondence, and published information as its research material. The findings of
the paper suggests that public service in telecommunication is a relatively ‘‘new’’
concept in the annals of Indian telecommunications and that a deregulated
environment along with the Right to Information movement holds significant hope
for making public service telecommunications a real alternative. The article provides
a reflexive, critical account of public service telecommunications in India and
suggests that it can be strengthened by learning gained from the continual renewal of
public service ideals and action by the postal services and a people-based demand
model linked to the Right to Information Movement. All studies done by the
researcher suggests that the right to information movement has contributed to the
revitalization of participatory democracy in India and to a strengthening of public
service telecommunications.

GROWTH IN SEGMENTS
According to a Frost & Sullivan industry analyst, by 2012, fixed line revenues are
expected to touch US$ 12.2 billion while mobile revenues will reach US$ 39.8 billion in
India. Fixed line capex is projected to be US$ 3.2 billion, and mobile capex is likely to
touch US$ 9.4 billion.

Further, according to a report by Gartner Inc., India is likely to remain the world's second
largest wireless market after China in terms of mobile connections. According to recent
data released by the COAI, Indian telecom operators added a total of 10.66 million
wireless subscribers in December 2008. Further, the total wireless subscriber base stood
at 346.89 million at the end of December 2008.

The overall cellular services revenue in India is projected to grow at a CAGR of 18 per
cent from 2008-2012 to exceed US$ 37 billion. Cellular market penetration will rise to
60.7 per cent from 19.8 per cent in 2007.

The Indian telecommunications industry is on a growth trajectory with the GSM

operators adding a record 9.3 million new subscribers in January 2009, taking the total
user base to 267.5 million, according to the data released by COAI. However, this figure
does not include the number of subscribers added by Reliance Telecom.

In WiMax, India is slated to become the largest WiMAX market in the Asia-Pacific by
2013. A recent study sees India's WiMAX subscriber base hitting 14 million by 2013 and
growing annually at nearly 130 per cent. And investments in WiMAX ventures are slated
to top US$ 500 million in India, according to a report by US-based research and
consulting firm, Strategy Analytics.

VALUE-ADDED SERVICES MARKET

A report by market research firm IMRB stated that the mobile value-added services
(MVAS) industry was valued at US$ 1.15 billion in June 2008, and is expected to grow
rapidly at 70 per cent to touch US$ 1.96 billion by June 2009.
Currently, MVAS in India accounts for 10 per cent of the operator's revenue, which is
expected to reach 18 per cent by 2010. According to a study by Stanford University and
consulting firm BDA, the Indian MVAS is poised to touch US$ 2.74 billion by 2010.

Mobile advertising, which is an important VAS segment, offers great potential to become
an important revenue source. Marketers are increasingly using MVAS as a step ahead of
SMS-based marketing to sell soaps and shampoos, banking, insurance products and also
entertainment services, and rural markets are proving to be very receptive for such
marketing.

Further, Venture Capitalists like Canaan Partners, Draper Fisher Juvertson, Helion, and
Nexus India are also innovating with services like mobile payment options, advertising,
voice-based SMS and satellite video streaming.

According to Venture Intelligence, there were nine deals worth US$ 41 million in 2007 in
the mobile VAS space, and till August 2008, seven deals worth US$ 91 million had
already been finalized. Presently, mobile VAS has a US$ 700 million market with a 20
per cent y-o-y growth, which is likely to touch US$ 3 billion by 2012.

From the above reviews it can be concluded that many researches have
been conducted before but no researches have been conducted to study
the performance of leading players. This topic had been chosen keeping
in mind the increasing competition in telecom industry and to study the
position of Reliance communications as compared to 4 other top
players. This gap has been fulfilled by this research report which gives a
practical insight into the concept of working capital management.
2-
CH NO. 3: CRITICAL REVIEW OF LITERATURE
WORKING CAPITAL - OVERALL VIEW

Working Capital management is the management of assets that are current in nature.
Current assets, by accounting definition are the assets normally converted in to cash in a
period of one year. Hence working capital management can be considered as the
management of cash, market securities receivable, inventories and current liabilities. In
fact, the management of current assets is similar to that of fixed assets the sense that is
both in cases the firm analyses their effect on its profitability and risk factors, hence they
differ on three major aspects:
1. In managing fixed assets, time is an important factor discounting and
compounding aspects of time play an important role in capital budgeting and a
minor part in the management of current assets.
2. The large holdings of current assets, especially cash, may strengthen the firm’s
liquidity position, but is bound to reduce profitability of the firm as ideal car yield
nothing.
3. The level of fixed assets as well as current assets depends upon the expected
sales, but it is only current assets that add fluctuation in the short run to a
business.
To understand working capital better we should have basic knowledge about the various
aspects of working capital. To start with, there are two concepts of working capital:
 Gross Working Capital
 Net working Capital

Gross Working Capital: Gross working capital, which is also simply known as working
capital, refers to the firm’s investment in current assets: Another aspect of gross working
capital points out the need of arranging funds to finance the current assets. The gross
working capital concept focuses attention on two aspects of current assets management,
firstly optimum investment in current assets and secondly in financing the current assets.
These two aspects will help in remaining away from the two danger points of excessive
or inadequate investment in current assets. Whenever a need of working capital funds
arises due to increase in level of business activity or for any other reason the arrangement
should be made quickly, and similarly if some surpluses are available, they should not be
allowed to lie ideal but should be put to some effective use.
Net Working Capital: The term net working capital refers to the difference between the
current assets and current liabilities. Net working capital can be positive as well as
negative. Positive working capital refers to the situation where current assets exceed
current liabilities and negative working capital refers to the situation where current
liabilities exceed current assets. The net working capital helps in comparing the liquidity
of the same firm over time. For purposes of the working capital management, therefore
Working Capital can be said to measure the liquidity of the firm. In other words, the goal
of working capital management is to manage the current assets and liabilities in such a
way that a acceptable level of net working capital is maintained.

Importance of working capital management:

Management of working capital is very much important for the success of the business. It
has been emphasized that a business should maintain sound working capital position and
also that there should not be an excessive level of investment in the working capital
components. As pointed out by Ralph Kennedy and Stewart MC Muller, “the inadequacy
or mis-management of working capital is one of a few leading causes of business failure.
Current assets, in fact, account for a very large portion of the total investment of the firm.

Table showing Current assets as percentage of Total assets

Year Percentage
2004 31%
2005 26%
2006 35%

40
35
30
25
20
15
10
5
0
2004 from the table that
It can be visualized 2005in the first year of
2006
our study i.e. 2004 it was 31%
which was reduced to 26% in the next year and in 2006 it is 35% shows fluctuating trend.

Determinants of Working Capital:

There is no specific method to determine working capital requirement for a business.
There are a number of factors affecting the working capital requirement. These factors
have different importance in different businesses and at different times. So a thorough
analysis of all these factors should be made before trying to estimate the amount of
working capital needed. Some of the different factors are mentioned here below:-

1. Nature of business: Nature of business is an important factor in determining the

working capital requirements. There are some businesses which require a very
 nominal amount to be invested in fixed assets but a large chunk of the total
investment is in the form of working capital. There businesses, for example, are of
the trading and financing type. There are businesses which require large
investment in fixed assets and normal investment in the form of working capital.
2. Size of business: It is another important factor in determining the working capital
requirements of a business. Size is usually measured in terms of scale of operating
cycle. The amount of working capital needed is directly proportional to the scale
of operating cycle i.e. the larger the scale of operating cycle the large will be the
amount working capital and vice versa.
3. Business Fluctuations: Most business experience cyclical and seasonal
fluctuations in demand for their goods and services. These fluctuations affect the
business with respect to working capital because during the time of boom, due to
an increase in business activity the amount of working capital requirement
increases and the reverse is true in the case of recession. Financial arrangement
for seasonal working capital requirements are to be made in advance.
4. Production Policy: As stated above, every business has to cope with different
types of fluctuations. Hence it is but obvious that production policy has to be
planned well in advance with respect to fluctuation. No two companies can have
similar production policy in all respects because it depends upon the
circumstances of an individual company.

5. Firm’s Credit Policy: The credit policy of a firm affects working capital by
influencing the level of book debts. The credit term is fairly constant in an
industry but individuals also have their role in framing their credit policy. A
liberal credit policy will lead to more amount being committed to working capital
requirements whereas a stern credit policy may decrease the amount of working
capital requirement appreciably but the repercussions of the two are not simple.
Hence a firm should always frame a rational credit policy based on the credit
worthiness of the customer.
6. Availability of Credit: The terms on which a company is able to avail credit
from its suppliers of goods and devices credit/also affects the working capital
requirement. If a company in a position to get credit on liberal terms and in a
short span of time then it will be in a position to work with less amount of
working capital. Hence the amount of working capital needed will depend upon
 the terms a firm is granted credit by its creditors.
7. Growth and Expansion activities: The working capital needs of a firm increases
as it grows in term of sale or fixed assets. There is no precise way to determine
the relation between the amount of sales and working capital requirement but one
thing is sure that an increase in sales never precedes the increase in working
capital but it is always the other way round. So in case of growth or expansion the
aspect of working capital needs to be planned in advance.
8. Price Level Changes: Generally increase in price level makes the commodities
dearer. Hence with increase in price level the working capital requirements also
increases. The companies which are in a position to alter the price of these
commodities in accordance with the price level changes will face fewer problems
as compared to others. The changes in price level may not affect all the firms in
same way. The reactions of all firms with regards to price level changes will be
different from one other.

CIRCULATION SYSTEM OF WORKING CAPITAL

In the beginning the funds are obtained by issuing shares, often supplemented by long
term borrowings. Much of these collected funds are used in purchasing fixed assets and
remaining funds are used for day to day operation as pay for raw material, wages
overhead expenses. After this finished goods are ready for sale and by selling the finished
goods either account receivable are created and cash is received. In this process profit is
earned. This account of profit is used for paying taxes, dividend and the balance is
ploughed in the business.
Working capital is considered to efficiently circulate when it turns over quickly. As
circulation increases, the investment in current assets will decrease. Current assets
turnover ratio speaks about the efficiency of Kotak Mahindra in the utilisation of current
assets. Fast turnover current assets results in a better rate on investment.

Table showing Current Assets Turnover Ratio

Year Ratio (in times)

2004 1.78
2005 2.98
2006 1.98
Average: 2.24

3
2.5
2
1.5
1
0.5
0
2004 2005 2006
The ratio average is 2.24 times in the study period of 3 years. In 2005 current assets
turnover ratio is highest one i.e. 2.98 during the 3 year study. Reasons being during this
year company has achieved sales growth 44.36% over the previous year and additional
activity needs more funds.

KOTAK MAHINDRA LIFE INSURANCE LTD.

Ratios useful to analyze working capital management

(A) Efficiency Ratios 2004 2005 2006 Ideal Ratio

1. Working Capital Turnover (times) 4.84 10.23 5.71 -
2. Current Assets Turnover (times) 1.78 2.98 1.97 -
3. Inventory turnover (times) 9.49 9.20 7.88 -

(B) Liquidity Ratio

1. Current Ratio 2.12 1.80 2.41 2.0
2.AcidTestRatio 1.15 0.98 1.03 1.0
3. Cash Ratio 0.57 0.08 0.05 0.5
(C) Structural Health of Working Capital
Ratio/Year 2004 2005 2006
1. CA 0.31 0.26 0.35
2. CL 0.15 0.14 0.14
3. Cash to CA 0.27 .04 0.02
4. Receivables to CA 0.27 0.50 0.40
5. Loans and Advances to CA 0.15 0.19 0.15
6. Inventory to CA 0.42 0.38 0.50
7. RM to Inventory 0.44 0.46 0.30
8. Stock spares to inventory 0.12 0.14 0.11
9. WIP to inventory 0.06 0.08 0.03
10. Finished Goods to Inventory 0.38 0.32 0.56

Interpretation (Ratio Analysis)

 The utilization rate of net working capital as depicted by working capital turnover
ratio is fluctuating during the period. It shows that working capital has not been
effectively used over the period of years except in the year 2005.
 As shown by current assets turnover ratio, the utilisation of current assets in terms
of sales has shown a decreasing trend which shows that current assets has been
effectively used to achieve sales.
 Again if we look at the efficiency with which individual elements of working
capital have been utilized, the picture of inventory turnover is not very bright.
 Receivables turnover also shows a declining trend. Generally such a situation
does not suit the company.
 As we look at the extent of liquidity of working capital, we notice that the ratio
shows an increasing trend. This indicates improvement on the liquidity front.
 If we analyze the structural health of working capital, the proportion of current
assets to total assets has been appropriate during this period.
Such a higher proportion of current asset in the assets portfolio of Kotak
Mahindra Life Insurance Ltd. is quite acceptable.

Our analysis above indicates the areas of concern to management in making best possible
use of resources. Decreasing efficiency in the use of current assets hints of the possibility
of problems in working capital management.
On further analysis, inventory constitutes a major proportion of total current assets.
Among its various components, raw materials, stocks, spared and finished goods in
particular need further analysis as here stand out to the problem areas.

Cash Flow Statement (2005-06)

Sources Amount A Application Amount B

( in Lacs) (in Lacs)
Proceeds from 162.37 Loss from operation 185.27
borrowings
Sale of assets 27.34 Change in cash 5.01
Total 190.28 190.28
Summary of Cash Flow Analysis
a) Cash from operation to total cash available
= 185.31/190.28 = 97.38%
b) Cash from long term sources to total cash available
= 162.37/190.28 = 85.33%
c) Proceeds from sale of non-current assets to total cash
= 17 14/19028 = 0.90%

Schedule of Changes in Working Capital

Particulars Amount Changes in Working

(in lacs) Capital
Dec’2005 Dec’2006 Increase Decrease
(Debit) (Credit)
Current Assets
Inventories 93.87 146.36 52.48 -
Sundry Debtors 123.22 114.71 - 8.51
Cash and Bank 10.64 5.63 - 5.01
balances
Other current assets 20.14 21.66 1.52 -
247.87 288.36
Current Liabilities 137.02 116.07 20.95 -
Working capital (CA-CL) 110.85 172.29
Increase in Working Capital 61.44 - 61.44
172.29 172.29
74.96 74.96
Fund Flow Statement (2005-06)

Sources Amount A Application Amount B

(in lacs) (in Lacs)
Increase in loan 162.37 Increase in working capital 61.44
Sale of asset 22.94 Loss from operation 123.87
Total 185.31 185.31

Summary of Fund Flow Analysis

1. Increase in net working capital — 61.44
2. Funds from operations to finance permanent address (123.87)
3. Ratio of fund flow from operations to total funds in the business (-) 123.87/85.31
= (66.85)

Interpretation (Fund Flow Statement)

1. Networking capital has been increased over the years, which has increased
liquidity
2. Company should take corrective actions to covert loss from operation to funds
from operation.