Escolar Documentos
Profissional Documentos
Cultura Documentos
ON
MANAGEMENT OF CHANNEL FINANCING
Submitted to:
Submitted
by:
ABHINAV
00314188813
INDEX
Declaration
Acknowledgement
ii
Executive Summary
iii
Chapter-1: Introduction
1.1Industry Overview
1.1.1Indian Tractor Industry
1.1Company Overview
1.1.1Escorts Ltd.
1.1.1Agri-Machinery Group
1.1.1History of Agri-Machinery Group
1.1.1Products of Escorts Agri-Macinery Group
1.1.1Comparison of Escorts with the Major Tractor Manufactures
Chapter-2: Literature review
Chapter-3: Project Profile
2.1 Objectives of the Study
2.2 Methodology
2.3 Channel Financing
2.3.1 Meaning
2.3.2 Benefits of channel financing
Declaration
I, ABHINAV, a student JIMS KALKAJIhereby declare that I have worked on a project titled
Management Of Channel Financing Of Escorts Agri Machinery Group during my
summer internship at Escorts Limited.
I guarantee/underwrite my research work to be authentic and original to the best of my
knowledge in all respects of the process carried out during the project tenure.
My learning experience at Company Name, under the guidance of Industry Mentor Name,
Designation, and Faculty guide Name, Designation, has been truly enriching.
ACKNOWLEDGEMENT
I would like to gratefully acknowledge the contribution of all the people who took active part and
provided valuable support to me during the course of this project. To begin with, I would like to
offer my sincere thanks to Mr.Vijay Nehra, Team Manager-Finance , for giving me the
opportunity to do my summer training at Escorts Agri Machinery. Without his guidance,
support and valuable suggestions during the research, the project would not have been
accomplished.
My heartfelt gratitude also goes to the entire Finance team ( Mr. Taranjeet singh, Mr Ashok
Bhel , Mr Aurobindo Biswas,Head Commercial Finance , Ms Sunpreet Kaur)in Escorts Agri
Machinery Channel Finance Department ,for their co-operation and willingness to answer all my
queries, and provide valuable assistance.
Last, but not least, I would like to thank all Dealers for sharing their experience and giving their
valuable time to me during the course of my project.
ABHINAV
B.COM(H),
00314188813
JIMS,KALKAJI
EXECUTIVE SUMMARY
Escorts Ltd. is the holding company of the Escorts Group. Post restructuring agri-machinery or
tractors have become the focus area of operations. Other business that is two- wheelers, IT,
Telecom, constructionequipment, are controlled through subsidiaries and joint venture. Positive
off of its pistons business to a joint venture with a foreigncollaborator, Escorts is focusing on its
core competence of tractors.Escorts have strong hands in house engineering skills,
a widedistribution/service network and brand franchise.
Channel Finance is an innovative option for extending working capital finance to dealers who
have business relationships with large companies. Channel Financing is the mechanism through
which a financial institution meets the various funds related requirements along the Supply
Chain at the suppliers end. This thereby helps the supplier in sustaining a seamless business flow
and avoiding Working Capital related difficulties. Channel Finance usually covers discounting of
Trade Bills drawn by a company and accepted by its dealers, distributors or Channel Partners. It
also provides overdraft facility to the dealers or distributors who have business dealings with
large Corporate.
Chapter 1
Introduction
1.1INDUSTRY OVERVIEW
Indias agricultural sector is one of the most important components of the countrys economy,
although its share in the GDP has decreased substantially over the years. About 60 % of Indias
population is dependent on agriculture for its survival. Performance of the agricultural sector
continues to have a crucial impact on the price of essential goods and market demand for various
consumer products. Agricultural Equipment industry plays a major role in supporting the
performance of the agricultural sector in India. Farming activities are increasingly getting
mechanized, and the availability, quality and performance of agricultural equipments have an
increasing impact on improving the output and productivity of the agricultural sector.
Agriculture provides support for economic growth and social transformation of the country. As
one of the worlds largest agrarian economies, the agriculture sector (including allied activities)
in India accounted for 14.5 per cent of gross domestic product (GDP) at 2004-05 prices, in 201011 as compared to 14.7 per cent in 2009-10. In terms of composition, out of the total share of
14.5 per cent that agriculture and allied sectors had in GDP in 2010-11, agriculture alone
accounted for 12.3 per cent. Timely and corrective measures taken by the government helped
boost agricultural production and growth in agriculture and allied sectors reached 7.0 per cent in
2010-11, the highest growth rate achieved during the last six years. In 2011-12, agriculture and
allied sectors are estimated to achieve a growth rate of 2.5 per cent.
As a proportion of the value added by agriculture to GDP, Gross Capital Formation (GCF) in
agriculture and allied sectors rose to 20.1 per cent in 2010-11 from 13.5 per cent in 2004-05 at
2004-05 prices which is a positive trend.The rates of growth and share of agriculture and allied
activities in the GDP of the country are given below:
Source:
ITEM
2010-11
2011-12
7.0
2.5
14.5
13.9
Agriculture
12.3
1.4
Fishing
0.7
2009-10
2010-11
2011-12*
Central
The above Pie Chart explains that the share of Agriculture and Allied sectors in India has reduced
significantly from 14.7% in 2009-10 to 13.9% in 2011-12(as estimated). This means that the
focus of India has shifted from Agriculture to Manufacturing and Service sectors but still major
revenue is generated from Agriculture Sector only.
The
strong
Indian
tractor
volume
(for 9 months) due to favorable cyclical and structural demand drivers. While tractor volumes
remained robust throughout FY12 despite macro-economic headwinds, the domestic tractor
market has shown some signs of weakness over the last couple of months.
FY08
VOLUMES
FY09
FY10
Domestic +
346,508
345,827
Export
Source: CMIE Database; ICRA Estimates
441,174
FY11
FY12e
545,128
605,092
contributed to healthy demand side economics are good south-west monsoons supporting farm
output, strong rural liquidity sustained by higher minimum support price (MSP) for crops and
double digit food inflation, besides adequate credit availability driven by NBFCs and private
banks. Structural drivers like scarcity of farm labor in light of alternate employment
opportunities, steady replacement demand and growing non-agricultural use of tractors have also
supported tractor volumes.
Exports contribute about approximately 11% to the total tractor sales of India. Volumes saw a
decline in FY09-FY10 on account of global economic recession but a recovery was seen in FY11
and the growth momentum continued to be healthy in FY12. While Nepal, Bangladesh, Sri
Lanka and the United States remain major export destinations, the expanding footprint of Indian
tractor manufacturers in African and new South-East Asian markets is expected to drive export
growth further. Export to neighboring countries such as Thailand, Malaysia and Indonesia is
supported by the Asian Free Trade Agreement. Further, export volumes are expected to benefit
from the introduction of higher HP tractors by Indian manufacturers. TAFE, M&M, and John
Deere are the major tractor exporters from India.
The Indian tractor industry has 13 main national participants and some regional players as well.
The market share is, however, concentrated amongst the top-five manufacturers which account
for over 90% of the total sales volumes. With relaxation of the Foreign Direct Investment in
agriculture to boost productivity, large international participants such as AGCO Corporation,
CNH Global and John Deere entered the Indian Tractor market few years ago. Most of these
international manufacturers have continued to maintain their presence in India either through
their wholly-owned subsidiaries, joint ventures or through technical collaborations. As there as
relatively low entry barriers in the tractor industry in terms of technology, costs involved in
branding, distribution network and spare parts availability act as barriers.
The tractor industry has witnessed consolidation in 2005 and 2007 with merger of manufacturers
such as Eicher Tractors with TAFE and Punjab Tractors with M&M, respectively.
1.2COMPANY OVERVIEW
1.2.1 ESCORTS LIMITED
The Escorts Group is among the India's leading engineering conglomerates which operate
in the high growth sectors of agri-machinery, construction & material handling equipment,
railway equipment and auto components.Having pioneered farm mechanization in the country,
Escorts has played a pivotal role in the agricultural growth of India for more than five decades.
Being one of the leading tractor manufacturers of the country, it offers a comprehensive range of
tractors, more than 45 variants starting from 25 to 80 HP. Escort, Farmtrac and Powertrac are the
most widely accepted and preferred tractor brands.
It has been a leading material handling and construction equipment manufacturer for a diverse
range of equipments like cranes, loaders, vibratory rollers and forklifts. Today, Escorts is the
world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer. Escorts have been a major
player in the railway equipment business in India. Their product offering includes brakes,
couplers, shock absorbers, rail fastening systems, composite brake blocks and vulcanized rubber
parts.In the Auto components segment, Escorts is a leading manufacturer of auto suspension
products including shock absorbers and telescopic front forks.
Throughout the evolution of Escorts, It has been a harbinger of new technology and a prime
mover on the industrial front by introducing wide range of new products and technologies that
helped to take the country forward for its betterment.
The major revenue for Escorts (around 74%) comes from its Agri Machinery Division. There are
other companies as well which contribute to the overall revenue share like Construction
equipment accounts for 17%, Railway equipment 6% and Auto components around 3%
approximately.
Today, Escort Agri Machinery Group has a nationwide network with over 600 dealers, 100 parts
stockists and 30 area offices. Their national share stands at 20%. The company has developed its
own in-house state-of-the-art technology R&D facility. The main focus of the R&D facility is to
develop new and better products that can offer improved performance with lower fuel
consumption and least maintenance and parts requirements.
Escorts Limited pioneered farm mechanization in India with foray in tractor manufacturing
in1960. Escorts Limited manufactures wide range of tractors (from 27-75 HP). Its brands
Farmtrac, Powertrac and Escort are well recognized and widely accepted in the Indian market as
well as overseas. The major importers of Escorts tractors are North America, Africa and Europe.
Besides tractors, the Agri Machinery division also manufactures implements, trailers and
lubricants. It commands an overall market share of 13% (approx) of the total domestic tractor
industry.
Thetotal revenue of the Agri Machinery Division has increased over the past few years and it has
been ranging between 20000 to 35000 Million Rs (approximately). The growth rate however,
increased initially at a steady rate, then declined during the year 2010-11 but has been stable for
the last two financial years.
1.2.5 PRODUCTS OF ESCORTS AGRI MACHINERY
TRACTORS
Farmtrac:
Farmtrac brand are the most powerful premium range of tractors that give maximum
productivity to the farmers. These are agricultural tractors with power 60 to 110 HP.They are
embedded with cutting edge technology combined with the quality of components used in
various elements, their reliability results from using solutions of companies like Carraro and
Perkins. These tractors were designed for farms and companies with wide variety of needs.
Outstanding comfort in the cabin resulting from good ventilation, available space provide
proper working conditions.
There are various Farmtrac models as well like FT 670 2 WD, FT 670 4 WD, FT 685 DT ,
FT 690 DT etc.
Powertrac:
Powertrac tractors are built in India by the Escorts Group (Escorts Agri) for sale in India.
They are considered the economy-models, and is one of most popular brands built by
Escorts Agri Machinery division.
Escort:
Escort brand of tractors are symbolic of reliability and trust and enjoy the confidence of the
farming community for the last 40 years. It comes under the economy range and the tractor
has 2 cylinders with 27 - 35 Hp.
Under the Jai Kissanseries , the second most popular tractor range is the AGMAXX tractors
which are manufactured to cater to the emerging agriculture and PTO operated applications.
This range of Tractors has dual clutch and adjustable front axle, that increase productivity
and saves customers time and money. Such kind of tractor can be used as Rotavator, Straw
Reaper, Potato Digger, Thresher, bailer, Harvester and Potato Planter.
Loadmaxx:
Under the Jai Kissanseries ,another tractor range is the LOADMAXX tractors which are well
equipped to cater to the heavy haulage applications and are built with Oil immersed brakes and cera
metallic clutch., extra Torque Machine , 3rd Hydraulic Lever with Coupler.It is best suited for Single
Axle Trolley, Double Axle Trolley, and Tipping Trolley.
Supermaxx:
Under the Jai Kissanseries ,another tractor range is the SUPERMAXX tractors which caters to both,
emerging Agri and Heavy Haulage requirement of their customers. It is best suited for Rotavator,
Laser Leveller, Reaper, Loaded trolley, and Tipping trolley.It also has extra features like Oil
Immersed Brakes, Power Steering, extra Torque Machine, Heavy Hydraulic Lift ,Multi Speed
Reverse PTO, Flexi Axle, Bigger Tyre and Dual PTO.
Inframaxx:
Under the Jai Kissan series, another tractor range is the INFRAMAXX tractors which has been built
to cater to the increasing use of tractor in commercial and construction applications. It is best suited
for Loader, Dozer, Backhoe Loader, grader, etc. It also has extra features like Epicyclic Reduction, 24
Speed Synchromesh, Synchro Shuttle.
1.2.6.COMPARISIONOF
MANUFACTURERS
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
ESCORTS
WITH
OTHER
MAJOR
TRACTOR
38292
20116
8946
1844
Escorts sales are less in the 21-30HP Tractors Category when compared to other manufacturers
like Mahindra & Mahindra which has the highest sales in this category.
120000
99062
100000
80000
60000
40434
40000
20000
20146
20049
Escorts sales are very less in the 31-40HP Tractors Category and Mahindra & Mahindra has the
highest sales of 99062 Tractors in this category. Even the sales of TAFE and Sonalika were more
than Escorts.
45000
40000
40739
37153
35000
30000
25000
20000
15000
17377
13336
10000
5000
0
Escorts is a major seller of 41-50HP Tractors and contributes to a total market share of 37153
tractor sales which is slightly less than sales of Mahindra & Mahindra Ltd.
40000
37882
35000
30000
25000
20000
15000
11248
10000
6588
5000
0
Escorts
0 Ltd.
TAFE
Sonalika Ltd.
Mahindra &mahindra is the major player in the indian tractor industry and has sold 37882
tractors in the Above 51Hp tractor category in 2010-11 financial year. Escorts although being a
major contributor to the overall tractor industry doesnt have any sales in this category in 2010-11
financial year.
CHAPTER 2
LITERATURE REVIEW
TiwariRahul2010, Analysis about the Retail and Channel Finance of Commercial Vehicle
Industry with reference to Tata Motors:
The objective of the research was to know the awareness about Tata commercial vehicles among
customers and its sales people, to analyze the retail and channel finance system of Tata Motors
and to analyze the popularity of financing schemes of Tata Motors in comparison to other
companies. The primary data for the research was collected through questionnaire method,
secondary data was collected through internet, annual reports, magazines etc. A total sample size
of 250 respondents on a random basis was taken to study the consumer perception. The research
concluded that the Tata Motors has well known schemes which helped its customers in getting
financed easily. Tata Motors had offereddifferent schemes of financing for every customer and
therefore the customer satisfaction has always been high with their financing schemes as
compared to other companies. According to Tata Motors survey, it can be concluded that they are
providing better channel financing than other commercial vehicle manufactures. This helped to
know how the channel financing facility provides benefits to the company and as the main
activities of Escorts is also linked with providing channel finance facility to its dealers , this
research paper helped to understand the whole channel finance procedure followed by the
companies.
SadanaKumar Sanjay, Impact of Working Capital Management on Profitability with
Special reference to Steel Industry:
This working capital paper is a conceptual analysis of working capital and its impact on
profitability of an organization. The objective of this research paper was to take selective firms
representing private sector and public sector and compare them on the efficient management of
the working capital and its components. They had taken two public sector steel majors and eight
private sector steel players.Theaim was to find out the working capital practices prevalent in
public sector majors and private sector to make a comparison and to highlight the importance of
working capital and its impact on profitability. The research was undertaken to gain familiarity
with the various components of working capital in Steel Industry and to judge the success of the
management in carrying on the daily transactions of the Industry. The main focus was to judge
the efficiency in themanagement of short-term liquidity in selected public and private sector Iron
and Steel enterprises in India. The research paper concluded that studying the working capital
requirements is very important to check the liquidity and profitability position of the company.
This research paper has helped to understand what all ratios need to be analyzed with respect to
Escorts Ltd in order to check its liquidity position and maintain its long term survival in the
overall Tractor Industry.
ChaudhariShekhar (2007) ; This research article is based on an in-depth study of five
major manufacturing firms both in the private as well as public sectors.
This paper discussed the process of technology acquisition and assimilation in the tractor
industry and has drawn some implications for public policy as well. The study had revealed that
there has been an increase in the bargaining power during the period 1960-74 of Indian firms
over their foreign collaborators. It had also led to change in the Research and Development focus
from production related trouble shooting and indigenization to quality assurance, value
engineering and new product development with the onset of competitive forces in the industry.
Major data sources for the research were in-depth interviews of some 60 senior company
executives and various documents like detailed project, reports, organizational announcements
etc.
Chapter 3
Project Profile
3.1 OBJECTIVES OF THE STUDY:
To analyze the process of meeting the short term credit requirement of the company and the
dealers
To understand the he financing terms with the banks and the financial institutions of the
company and the dealers.
To analyze the retail and channel financing system of Escorts Argi-Machinery Group.
3.2METHODOLOGY:
Research Type: The research design is Descriptive as well as Exploratory in nature.
Population and Sample Size: The total number of dealers the company deals with is 160(i.e.
population size). We have taken a sample of 5 dealers, located in different areas. The sample has
been taken on random basis.
Type of Data: Secondary data is used for analysis. The financial statements already prepared by
the dealers have been used.
Sources of Data: The financial reports of the dealers are used as a source of data. The C.A.
Certified provisional financial statements(i.e. income statement and balance sheet) have been
analyzed and evaluated. The financial reports of the dealers have been taken from the company,
which have been provided by the dealers.
Methods and Techniques: As under:
Various liquidity, activity and profitability ratios have been used for analyzing the short-term
suppliers and dealers to the bank. Thereafter, the bank makes a due diligence assessment of the
suppliers/dealers standing and credit worthiness and decides to provide finance on merit.
The pre and post sale working capital requirement of the manufacturing concern would be scaled
down. Such firms can concentrate more on their core competence area of production and
marketing their products besides saving time and costs involved in arranging creditors and
monitoring recovery. As regards the suppliers and dealers, the major benefit is that they get
payments promptly, which improve their liquidity position and cost. This also helps them as well
as the bank to cut level of counter party risks.
The banks also gain substantially from the process of channel financing which include increased
customer base, effective due diligence and smoothness of lending activity and loan origination
process. Besides, the banks will be able to ensure better credit discipline. Since the risk is
diversified through finance to supplier, manufacturer and the dealers, the credit exposure norms
are better observed. Hence channel financing is a very convenient tool in managing their assets
portfolio.
Channel financing, due to its distinct advantages to the business firms as well as banks, has been
suggested for implementation in various forms, by various committees in India such as
receivable financing by Tandon Committee, drawee bills financing by Chore Committee and
through factoring by Kalyansundram Committee. Channel financing opens up manifold
opportunities due to which the banks can make conscious efforts at popularizing this credit
delivery mechanism.
Channel Financing has two aspects:
C
h o
a o
nn
n n O
e
Fa
n
a
n
vc
u
t
d
n
l
a
Td
F
i
lt
v
f
r
e
i
i
B c
c
r i
r
r
t
i
n
g
Discounting of Trade Bills: It includes discounting of trade bills drawn by a company and
accepted by its Dealers / Distributors / Channel Partners.
Providing Overdraft facility: It includes providing overdraft facility to the dealers /
distributors who have business dealings with large Corporate.
Through channel financing, the business firms can out-source a major part of their working
capital needs thereby reducing their dependence on bank finance. Channel financing opens up
manifold opportunities due to which the banks can make conscious efforts at popularizing this
credit delivery mechanism.
Channel Finance can be used by corporate as a marketing tool and strengthening their
relationship and loyalty towards their channel partners.
It increases the efficiency of the receivable management and cash management process of the
corporate.
It helps in increasing sales through higher purchasing power for channel partners and ability
to introduce payment discipline with their channel partners.
Results in improved profitability.
To Banks:
Through channel financing process can increase their customer base
It ensures smoothness of lending activity, loan originations process of banks as well as
ensures better credit discipline.
As the risk can be diversified through finance to supplier, manufacturer and the dealers, the
exposure norms can be better observed.
Channel
Partner
Corporat
Bank
sheets for bill discounting. Smaller companies are usually not given priority and have to pay
higher interest rates.
Vendors too are doing their bit to help channels manage their internal finances better as well as
empower them with customer financing schemes.
qualified and
6. The corporates dont prefer channel financing as NBFCs have a higher rate of interest than
the banks due to their higher cost of funds. Other working capital products like overdraft
facility, cash credit account, letter of credit etc. carry lower rate of interest.
7. Also one of the major challenges which corporate face is non-cooperation from there debtors
and creditors.
8. Lack of awareness about the product.
Escorts Limited facilitated dealer finance tie-ups with banks and financial institutions by
leveraging the strengths of its relationships with banks. A dedicated team is appointed to visit
dealers in India at regular intervals to conduct this initiative. In the year 2010-11, company has
formalized arrangements with two of the major Public Sector Bank(s) who had agreed to extend
the drawee bill discounting facility to accredit dealers of Escorts limited with a total programme
size of Rs. 250 crores (State Bank of Patiala Rs. 50 crore and Punjab National Bank Rs. 200
crores). In a span of 5-6 months, the dealer portfolio under channel finance was able to touch 193
dealers.
Process of providing Channel Finance adopted by the Escorts Agri-Machinery Group:
On the basis of financial soundness and credit worthiness of the dealers the company ensures the
channel finance facility to the dealers. It includes following:
Selling Process:
Escorts AgriMachinery
Deal
Distribut
The basic process of selling by escorts was selling to the distributors and than to the dealers.
Whereas, now the company focuses on eliminating the distributors (i.e. middle men) and selling
directly to the dealers.
Escorts AgriMachinery
Deal
Under this selling process the company and the dealer come in direct contact with each other and
direct selling is involved, where dealers can directly purchase from the company. There is a limit
of finance provided to each dealer and here is the main role of channel financing. In which the
Banks provides finance to the dealer against the bill of exchange drawn by the company against
the dealer on the invoice amount. The company has appointed area officers at each area, who are
in direct contact and interact with the dealers.
Steps involved in Channel Financing:
The area officer draws the bill of exchange in the name of the company against the dealer for
the units of tractor purchased by the dealer
The dealer accepts the bill of exchange (hundi) and sends it back to the company along with
the post dated cheque.
The required or maximum trade of cycle can be 60 days.
After the bill of exchange is received by the company, it analyses the financial statements of
the dealer and sends the analyzed report along with the bill of exchange for discounting.
The bank on the basis of companys analyzed report, its terms and conditions and after
analyzing the dealers financial statements, discounts the bill of exchange and grants loan to
the dealer.
During the peak season (i.e. February or June and July) the banks and company increase the limit
of channel finance provided by them.
Financial Statements required:
The dealer need to provide the company with various financial data, that company can analyse
and on the basis of dealers financial soundness (i.e. strong liquidity and profitability position),
grants finance to the dealer from the bank. Following statements of the dealer are required:
Current quarter balance sheet (i.e. of 3 months)
C.A. certified documents
Last 2 years audited balance sheets
Provisional balance sheet
Analysis of dealers Financial Statements:
The analysis is done basically to analyze the short term financial position of the dealer. The
liquidity and profitability position of the channel partner is analyzed. Following calculations and
analyses is carried on by the company:
Calculation of Ratios:
Ratios are used to compare risk and return of different firms in order to help equity investors and
creditors make intelligent investment and credit decisions. Short-term bank and trade creditors
are primarily interested in the immediate liquidity of the firm. Ratios provide a profile of a firm,
its economic characteristics and competitive strategies, and its unique operating, financial, and
investment characteristics. Activity, liquidity and profitability analysis is done of dealers firm to
provide it with finance facility.
Operating Cycle
Cost of Goods Sold Ratio
Interest Coverage Ratio
Consortium Value
Maximum Bank Permissible Finance Limit (MBPF): As per following:
o Tandon Committee
o Nayak Committee
Chapter 4
Observations and Analysis
4.1 ANALYSIS OF VARIOUS DEALERS:
Activity, liquidity and profitability analysis is done of dealers firm to provide it with finance
facility.
1. Activity analysis: It evaluates revenue and output generated by firms assets. Activity ratios
describe the relationship between the firms level of operations (usually defined as sales) and
the assets needed to sustain operating activities. The higher the ratio, the more efficient the
firms operations. Under it following analysis is done:
Inventory turnover ratio: It measures the efficiency of the firms inventory management.
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
8.661
6.183
6.811
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
4.482
13.57
A higher ratio indicates that inventory does not remain in warehouses or on the shelves but
rather turns over rapidly from the time of acquisition to sale.
It is further used for calculating:
Inventory conversion period: it is defined as average number of days the inventory is in stock. It
measures average time period taken to convert the raw material to sales.
Inventory Conversion Period = 360 / Inventory
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
41.57
58.223
52.854
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
80.31
26.524
Channel Finance is provided to those dealers of the company whose inventory conversion period
is upto 60 days. All the above dealers are meeting the required criteria except M/S Shiv Motors
which is having an ICP of 80 days.
Debtors turnover / Receivables Turnover ratio: It measures the effectiveness of the firms
credit policies and indicates the level of investment in receivables needed to maintain the
firms sales level. It is used to evaluate the firms operating performance.
Debtors Turnover Ratio = Sales / Average Debtors(Trade
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
18.74
26.829
15.064
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
27.188
6.061
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
19.21
13.418
23.897
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
13.24
59.394
Channel Finance is provided to those dealers of the company whose Debtor Collection Period is
upto 60 days. All the above dealers are meeting the required criteria and M/S Shiv Motors has a
lowest DCP of 13 days which means that the debtors are collected quickly.
M/S SAI
TRACTORS
8.454
34.67
17.693
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
5.834
5.336
Creditors Payable Period: It is defined as an average number of days the payables are
outstanding. Defined as:
Creditors Payable Period = 360 / Creditors
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
42.58
10.38
20.34
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
61.704
67.459
Channel Finance is provided to those dealers of the company whose Creditors Payable Period is
upto 60 days. The above dealers are meeting the required criteria except M/S Shiv Motors and
M/S Bhargava Trading Corp. which are exceeding the required limit.
2. Liquidity analysis: It measures the adequacy of a firms cash resources to meet its near-term
cash obligations. The short-term lenders assess the ability of a firm to meet its current
obligations. That ability depends on the cash resources available as of the balance sheet date
and the cash to be generated through the operating cycle of the firm. Generally, the higher the
value of the ratio, the larger the margin of safety that the company possesses to cover shortterm debts. Under it following analysis is done:
Current Ratio: It defines cash resources as all current assets. It measures the firms ability
to meet its current obligations. The current ratio can give a sense of the efficiency of a
company's operating cycle or its ability to turn its product into cash. The higher the
current ratio, the more capable the company is of paying its obligations.
Current Ratio = Current Assets / Current
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
1.654
7.35
1.312
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
1.21
1.295
The ideal current ratio is 1.5:1. The higher the current ratio, the better will be the liquidity
position of the company. M/s Sai Tractors has a current ratio of 7.35 which is the highest. A very
high ratio is also not appropriate because the funds of the company are lying idle as cash. The
current ratio of Jatti Tractors is apt.
Quick Ratio: It measures a firm's ability to meet its short-term obligations with its most
liquid assets. The quick ratio is more conservative than the current ratio because it excludes
inventory and other current assets (i.e. prepaid expenses), which are more difficult to turn
into cash. Also known as acid test ratio. Defined as:
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
0.546
2.766
0.503
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
0.185
0.983
Quick
Ratio
=
(Cash+MarketableSecurities+Accounts
Receivables) / Current Liabilities
A higher ratio means a more liquid current position and better position of the company. The ideal
quick ratio is 0.33:1. M/s Sai Tractors has a current ratio of 2.766 which is the
highest. Avery
high ratio is also not appropriate because the funds of the company are lying idle as cash
Working Capital Ratio: Working Capital is calculated by subtracting current liabilities from
current assets.
Working Capital = Current Assets Current
Liabilities
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
1724121
20317000
15182932
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
4357799
2825406
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
0.654
6.349
0.3122
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
0.21
0.2959
Higher the ratio, better it is for the company as it shows stronger liquidity position.M/S Sai
Tractors has the highest Working Capital Ratio of 6.349.
3. Profitability analysis: Profitability ratios show firms overall efficiency and performance. It
is used to assess a business's ability to generate earnings as compared to its expenses and
other relevant costs incurred during a specific period of time. The objective of this analysis is
to detect consistency in the earnings of the firm. Under this following analysis is done:
Net Profit Margin: It is an indication of how effective a firm is at cost control. It measures the
overall profit margin net of all expenses.
Net Profit Margin = (Net Profit /
JATTI
MODERN
TRACTORS TRACTORS
1%
0.2%
M/S SAI
TRACTORS
0.9%
0.69%
0.13%
A higher profit margin indicates a more profitable company that has better control over its costs
compared to its competitors.Jatti Tractors has the highest Profit margin.
4. Operating Cycle: The average length of time between when a firm purchases items for
inventory and when it receives payment for sale of the items. A long operating cycle tends to
harm profitability by increasing borrowing requirements and interest expense.
Net Operating Cycle = Inventory Conversion Period + Receivables Conversion
Period Payables Deferral Period
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
18.195
61.257
56.406
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
31.846
18.46
As per the company norms, the operating cycle of dealers firm should be maximum of 60
days.All the above dealers comply with the requirements except M/S Sai Tractors which has a
slightly higher Net Operating Cycle.
5. Cost of Goods Sold Ratio: Itmeasures cost as a percentage of sales. Cost of goods sold refers
to the inventory costs of those goods a business has sold during a particular period. It includes
the cost of the materials used in creating the good along with the direct labor costs used to
produce the good.
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses
JATTI
MODERN
TRACTORS TRACTORS
90.88%
98.1%
M/S SAI
TRACTORS
93.7%
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
91.1%
97.6%
The ratio is expressed in terms of percentage. As per company norms the COGS of the dealers
firm should not be less than 90-91 percentage of sales value.
6.Interest Coverage Ratio / Times interest earned:
JATTI
MODERN
TRACTORS TRACTORS
M/S SAI
TRACTORS
1.671
1.538
1.167
M/S
M/S BHARGAVA
SHIV
MOTORS TRADING
CORPORATION
1.742
40.524
Modifications in the Cash Credit system to make it amenable to better management of funds
by the Bankers
Alternate type of credit facilities to ensure better credit discipline and co relation between credit
and production.
According to Tondon Committee, Escorts Agri Machinery group follows the following
norms.The Maximum permissible banking finance limit for dealers is MIN(x,y) where
X= Working Capital of the dealer, i.e Current Asset Current liabilities
Y= 25 % of the Total Current Assets
Nayak Committee:
The Nayak Committee report is applicable to units with credit requirements of less than Rs.50
lacs. According to Nayak Committee, Escorts Agri Machinery group follows the following
norms:-
According to RBI, The Working Capital of the dealers should be as follows:Working Capital = 20% of [Projected Turnover of Dealer ConsortiumValue(short term
borrowings)]
RBI has also given full freedom to all the Banks to devise their own method of assessing the
short term credit requirements of their clients and grant lines of credit accordingly. Most banks,
however, continue to be guided by the principles enunciated in Tandon Committee report.
4.2Limit Of The Dealers
The Channel financing limit for the dealers of Escorts is decided on the basis of the above
formula and every dealer is given finance based on its working capital requirements , its
profitability and growth position in near future.
The Maximum Banking finance limit for the selected Escorts dealers is as follows :JATTI
TRACTORS
MODERN
TRACTORS
M/S SAI
TRACTORS
M/S
SHIV
MOTORS
30 Lacs
150 Lacs
100 Lacs
30 Lacs
M/S BHARGAVA
TRADING
CORPORATION
100 lacs
Therefore, Jatti tractors and M/S Shiv motors have the lowest Financing limit because of its less
strong liquidity position or may be the working capitl requirements of the company may be low.
The highest limit is for Modern Tractors around 150 Lacs which means it has a good reputation
in the market and has healthy relations with Escorts. The financing limit is decided in such a way
that it leads to satisfaction of both, the company as well as the dealers. This limit is provided to
the dealers if they comply with the requirements of the company as well as the Bank or Channel
partner involved.
Chapter 5
Conclusion
Taking in view the industry analysis it has been observed that Mahindra and Mahindra has the
largest share in the Indian tractor industry. Though Escorts is not far behind, having a major
share. The main procedure by escorts is channel finance in which there is no direct dealing with
customers rather it is with distributors and dealers. The balance sheet of dealers are analyzed and
based on various calculated ratios maximum permissible credit limit is decided for the dealers.
The company has been able to increase its revenue by approximately 90 crores by providing
channel finance facility. It helps in increasing the cash flow due to the timely payment by the
dealers thus meeting the short term requirements and improving the liquidity position of escorts
ltd.
RECOMMENDATIONS
General Recommendations:
The strategies followed by Escorts should be more aggressive in order to compete with its
competitors like Mahindra and Mahindra, TAFE and Sonalika ltd.
The company should hold regular meetings with its dealers and try improve its
Escorts do credit analysis of its customers on the basis of financial statements. It should enhance
that by introducing credit evaluation form to ensure that credit facility is provided to sound
parties. This will help the company in reducing bad debts and hence channelizing the money
locked up as bad debts into other productive uses.
A study may be conducted if required by experts to pinpoint reasons behind Escorts high
collection period of 90 days. Is it due to quality of products, quality of customers, the
segment of customers, marketing effort, distribution pattern or other reasons. A lower
turnover or a higher collection period implies excessive blockage of funds as debt, which might
result in stagnation of the business. Attempts to reduce down the debtors turnover ratio to 30
days should be made which would ensure better availability of funds for business operations.
Payment policies followed by Escorts should be reviewed time to time and steps should be taken
for prompt payments so that the good vendor base can be maintained.
One of the major reasons why the company is facing cash crises is because the actual cash
flow differs from the planned cash flow, which results in improper budgeting and incorrect
conclusions. Hence the company should take steps to improve the accuracy of cash plans made.
Steps should be taken to control the unnecessary cost incurred and by keeping an eye on the
expenses like by switching off the lights, fans and monitors when not in use,
travelling
and communication expenses can be reduced. Such steps should be taken for a smooth flow of
Cash.
There are many financial institutions which provide various services to speed up the collection
for the company and thus helping in gearing up the cash cycle. For eg: LOCK BOX,
CONCENTRATION BANKING etc. Company should avail such services from financial
institutions in order to improve liquidity.
Special efforts should be made to analyse loans & advances which is very high of its
current
assets.
and
non-
production/operation related. Nonproduction related cases might be financed from other sources
like debentures etc. and treated separately.
Chapter 6
Limitations
The scope of the study is limited to the dealers whose information was available and
could be gathered from the company.
Although every effort was made to collect the information through available sources, still
some relevant information could not be gathered.
There were restrictions to visit some specific places in Escorts Limited and due to the
busy schedules some of the concerned executives were not able to give time .
Due to the limited time duration each and every aspect of channel financing could not be
studied.
As the company on account of confidential report has not disclosed some figures.
Moreover in some cases separate account of division are not separately maintain ,leading
to restrictions in study.
Chapter7
References
Journals:
Tiwari Rahul 2010. Analysis about the Retail and Channel Finance of Commercial Vehicle
Industry with reference to Tata Motors
Other sources:
Website links:
http://www.escortsagri.com/
http://www.economictimes.com/
http://www.planware.com/
http://www.icraindia.com/
http://www.indianmba.com/