INTRODUCTION:

The project undertaken is on “WORKING CAPITAL MANAGEMENT IN NTPC”.

It describes about how the company manages its working capital and the various steps

that are required in the management of working capital.

Cash is the lifeline of a company. If this lifeline deteriorates, so does the company's

ability to fund operations, reinvest and meet capital requirements and payments.

Understanding a company's cash flow health is essential to making investment

decisions. A good way to judge a company's cash flow prospects is to look at its

working capital management (WCM).

Working capital refers to the cash a business requires for day-to-day operations or,

more specifically, for financing the conversion of raw materials into finished goods,

which the company sells for payment. Among the most important items of working

capital are levels of inventory, accounts receivable, and accounts payable. Analysts

look at these items for signs of a company's efficiency and financial strength.

The working capital is an important yardstick to measure the company’s operational

and financial efficiency. Any company should have a right amount of cash and lines of

credit for its business needs at all times.

This project describes how the management of working capital takes place at NTPC .
 COMPANY PROFILE
NTPC Limited is the largest thermal power generating company of India. A public

sector company, it was incorporated in the year 1975 to accelerate power development

in the country as a wholly owned company of the Government of India. At present,

Government of India holds 89.5% of the total equity shares of the company and the

balance 10.5% is held by FIIs, Domestic Banks, Public and others. Within a span of 31

years, NTPC has emerged as a truly national power company, with power generating

facilities in all the major regions of the country.

National Thermal Power Corporation is the largest power generation company in

India. The Forbes Global 2000 ranking for 2005 ranks it as the 5th leading company in

India and the 486th leading company in the world. It is a public listed (Bombay Stock

Exchange) Indian public sector company, with majority shares owned by the

Government of India. At present, Government of India holds 89.5% of the total equity

shares of the company and the balance 10.5% is held by FIIs, Domestic Banks, Public

and others. NTPC ranks amongst the top five companies, in terms of market

capitalisation.

NTPC's core business is engineering, construction and operation of power

generating plants and also providing consultancy to power utilities in India and

abroad. As on date the installed capacity of NTPC is 26, 404 MW through its 14
coal based (21,395 MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects

(1,054 MW).

From the above graph it’s been clear that NTPC is creating that leading benchmark

in all over the country, like above graph is dictating that the intensive and

remarkable growth covered by NTPC was started in year 1986-87 from 3000MW

with 20000BU and goes to inconsistent growth in year 2006-07 by 30000MW with

200000BU. This shows the effective installed capacity is leading a terrific

generation of power.
NTPC’s core business is engineering, construction and operation of power

generating plants. It also provides consultancy in the area of power plant

constructions and power generation to companies in India and abroad. As on date

the installed capacity of NTPC is 27,904 MW through its 15 coal based (22,895

MW), 7 gas based (3,955 MW) and 4 Joint Venture Projects (1,054 MW). NTPC

acquired 50% equity of the SAIL Power Supply Corporation Ltd. (SPSCL). This

JV company operates the captive power plants of Durgapur (120 MW), Rourkela

(120 MW) and Bhilai (74 MW). NTPC also has 28.33% stake in Ratnagiri Gas &

Power Private Limited (RGPPL) a joint venture company between NTPC, GAIL,

Indian Financial Institutions and Maharashtra SEB Holding Co. Ltd. The present

capacity of RGPPL is 850MW.

47817.4 crore

NTPC’s share on 31 Mar 2007 in the total installed capacity of the country was

20.18% and it contributed 28.50% of the total power generation of the country

during 2006-07.

NTPC has set new benchmarks for the power industry both in the area of power

plant construction and operations. It is providing power at the cheapest average

tariff in the country. With its experience and expertise in the power sector, NTPC

is extending consultancy services to various organisations in the power business.

NTPC is committed to the environment, generating power at minimal

environmental cost and preserving the ecology in the vicinity of the plants. NTPC

has undertaken massive afforestation in the vicinity of its plants. Plantations have

increased forest area and reduced barren land. The massive afforestation by NTPC

in and around its Ramagundam Power station (2600 MW) have contributed

reducing the temperature in the areas by about 3°c. NTPC has also taken proactive

steps for ash utilisation. In 1991, it set up Ash Utilisation Division to manage

efficient use of the ash produced at its coal stations. This quality of ash produced is

ideal for use in cement, concrete, cellular concrete, building material.

A "Center for Power Efficiency and Environment Protection (CENPEEP)" has

been established in NTPC with the assistance of United States Agency for

International Development. (USAID). Cenpeep is efficiency oriented, eco-friendly

and eco-nurturing initiative - a symbol of NTPC's concern towards environmental

protection and continued commitment to sustainable power development in India.

As a responsible corporate citizen, NTPC is making constant efforts to improve the

socio-economic status of the people affected by the projects. Through its

Rehabilitation and Resettlement programmes, the company endeavors to improve

the overall socio-economic status of Project Affected Persons.

NTPC was among the first Public Sector Enterprises to enter into a Memorandum

of Understanding (MOU) with the Government in 1987-88. NTPC has been Placed

under the 'Excellent category' (the best category) every year since the MOU system

became operative. Recognising its excellent performance and vast potential,

Government of the India has identified NTPC as one of the jewels of Public Sector

‘Navratnas’- a potential global giant. Inspired by its glorious past and vibrant

present, NTPC is well on its way to realise its vision of being “A world class

integrated power major, powering India’s growth, with increasing global

presence”. OBJECTIVE OF THE STUDY

 The objectives of this project were mainly to study the inventory, cash and

receivable at NTPC Ltd., but there are some more and they are –

The main purpose of our study is to render a better understanding of

the concept “Working Capital Management”.

To understand the planning and management of working capital at NTPC

Ltd.

To measure the financial soundness of the company by analyzing various

ratios.

To suggest ways for better management and control of working capital at the

concern.

DATA SOURCES:

The following sources have been sought for the prep of this report:

Primary sources such as business magazines, current annual reports, book on

Financial Management by various authors and internet websites the imp

amongst them being : www.NTPC.com, www.indiainfoline.com,

www.studyfinance.com .

Secondary sources like previous years annual reports, reports on working

capital for research, analysis and comparison of the data gathered.

 While doing this project, the data relating to working capital, cash

management, receivables management, inventory management and short

term financing was required.

This data was gathered through the company’s websites, its corporate

intranet, NTPC’s annual reports of the last five years.

A detailed study on the actual working processes of the company is also done

through direct interaction with the employees and by timely studying the

happenings at the company.

INTRODUCTION TO WORKING CAPITAL

“Working Capital is the Life-Blood and Controlling Nerve Center of a business”

The working capital management precisely refers to management of current assets. A

firm’s working capital consists of its investment in current assets, which include short-

term assets such as:

Cash and bank balance,

Inventories,

Receivables (including debtors and bills),

Marketable securities.

Working capital is commonly defined as the difference between current

assets and current liabilities.

 Working Capital = Current Assets-Current Liabilities

There are two major concepts of working capital:

Gross working capital

Net working capital

Gross working capital:

It refers to firm's investment in current assets. Current assets are the assets, which

can be converted into cash with in a financial year. The gross working capital points

to the need of arranging funds to finance current assets.

Net working capital:

It refers to the difference between current assets and current liabilities. Net working

capital can be positive or negative. A positive net working capital will arise when

current assets exceed current liabilities. And vice-versa for negative net working

capital. Net working capital is a qualitative concept. It indicates the liquidity position

of the firm and suggests the extent to which working capital needs may be financed

by permanent sources of funds. Net working capital also covers the question of

judicious mix of long-term and short-term funds for financing current assets.

Significance Of Working Capital Management

The management of working capital is important for several reasons:

For one thing, the current assets of a typical manufacturing firm account for half
of its total assets. For a distribution company, they account for even more.

Working capital requires continuous day to day supervision. Working capital has

the effect on company's risk, return and share prices,

There is an inevitable relationship between sales growth and the level of current

assets. The target sales level can be achieved only if supported by adequate

working capital Inefficient working capital management may lead to insolvency

of the firm if it is not in a position to meet its liabilities and commitments.

Liquidity Vs Profitability: Risk - Return trade off

Another important aspect of a working capital policy is to maintain and provide

sufficient liquidity to the firm. Like the most corporate financial decisions, the

decision on how much working capital be maintained involves a trade off- having

a large net working capital may reduce the liquidity risk faced by a firm, but it can

have a negative effect on the cash flows. Therefore, the net effect on the value of

the firm should be used to determine the optimal amount of working capital.

Sound working capital involves two fundamental decisions for the firm. They are

the determination of:

The optimal level of investments in current assets.

The appropriate mix of short-term and long-term financing used to support this

investment in current assets, a firm should decide whether or not it should use

short-term financing. If short-term financing has to be used, the firm must

determine its portion in total financing. Short-term financing may be preferred

over long-term financing for two reasons:

The cost advantage

Flexibility

But short-term financing is more risky than long-term financing. Following table

will summarize our discussion of short-term versus long-term financing.

Maintaining a policy of short term financing for short term or temporary assets

needs (Box 1) and long- term financing for long term or permanent assets needs

(Box 3) would comprise a set of moderate risk –profitability strategies. But what

one gains by following alternative strategies (like by box 2 or box 4) needs to

weighed against what you give up.

CLASSIFICATION OF WORKING CAPITAL

KINDS OF WORKING
CAPITAL

ON THE ON THE
BASIS OF BASIS OF
CONCEPT TIME

PERMANENT TEMPORARY/
GROSS NET
/FIXED VARIABLE
WORKING WORKING
WORKING WORKING
CAPITAL CAPITAL CAPITAL CAPITAL

REGULAR RESERVE SEASONAL SPECIAL

WORKING WORKING WORKING WORKING
CAPITAL CAPITAL CAPITAL CAPITAL

Types of Working Capital Needs

Another important aspect of working capital management is to analyze the total

working capital needs of the firm in order to find out the permanent and temporary
working capital. Working capital is required because of existence of operating

cycle. The lengthier the operating cycle, greater would be the need for working

capital. The operating cycle is a continuous process and therefore, the working

capital is needed constantly and regularly. However, the magnitude and quantum

of working capital required will not be same all the times, rather it will fluctuate.

The need for current assets tends to shift over time. Some of these changes reflect

permanent changes in the firm as is the case when the inventory and receivables

increases as the firm grows and the sales become higher and higher. Other changes

are seasonal, as is the case with increased inventory required for a particular

festival season. Still others are random reflecting the uncertainty associated

with growth in sales due to firm's specific or general economic factors.

The working capital needs can be bifurcated as:

Permanent working capital

Temporary working capital

Permanent working capital:

There is always a minimum level of working capital, which is continuously

required by a firm in order to maintain its activities. Every firm must have a

minimum of cash, stock and other current assets, this minimum level of current

assets, which must be maintained by any firm all the times, is known as

permanent working capital for that firm. This amount of working capital is
constantly and regularly required in the same way as fixed assets are required. So,

it may also be called fixed working capital.

Temporary working capital:

Any amount over and above the permanent level of working capital is temporary,

fluctuating or variable working capital. The position of the required working

capital is needed to meet fluctuations in demand consequent upon changes in

production and sales as a result of seasonal changes.

The permanent level is constant while the temporary working capital is fluctuating

increasing and decreasing in accordance with seasonal demands as shown in the

figure.

In the case of an expanding firm, the permanent working capital line

may not be horizontal. This is because the demand for permanent

current assets might be increasing (or decreasing) to support a rising

level of activity. In that case line would be rising.

FINANCING OF WORKING CAPITAL

There are two types of working capital requirements as discussed above.

They are:

Permanent or Fixed Working Capital requirements

Temporary or Variable Working Capital requirements

Therefore, to finance either of these two working capital requirements,

we have long-term as well as short-term sources.

FACTORS DETERMINING WORKING CAPITAL REQUIREMENTS

There are many factors that determine working capital needs of an enterprise.

Some of these factors are explained below:

 Nature or Character of Business.

The working capital requirement of a firm is closely related to the nature

of its business. A service firm, like an electricity undertaking or a

transport corporation, which has a short operating cycle and which sells

predominantly on cash basis, has a modest working capital requirement.

Oh the other hand, a manufacturing concern like a machine tools unit,

which has a long operating cycle and which sells largely on credit, has a

very substantial working capital requirement.

 NTPC carry on activities related to Sugar systems. Though they are

primarily an assembling firm they also have manufacturing facilities in

Chennai and Pondicherry. This requires them to keep a very sizeable

amount in working capital.

 Size of Business/Scale of Operations.

NTPC is the leader in its segment in both consumer as well as

commercial market share. They have increased their share in the

consumer segment notably in the last four years. This they have

achieved through retail expansion. The scale of operations and the size it

holds in the Indian IT market makes it a must for them to hold their

inventory and current asset at a huge level.

The rate of growth of sales indicates a need for increase in the working

capital requirements of the firm. As the firm is projected to increase

Rate of Growth of Business.their sales by 80% from what it was in

2016, it is required to guard them against the increasing requirements of

the net current asset by way of efficient working capital management.

The sales and projected sales level determine the investment in

inventories and receivables.

NTPC 2018 2017 2016 2015 2014

 PROJECTED

Gross Sales/Income 3400 2833 2381 1967.37 1522.03

from Operations

 Price Level Changes.

Changes in the price level also affect the working capital requirements.

It was the reduced margins in the price of the raw materials that had

prompted them to go for bulk purchases thus making on additions to

their net current assets. They might have gone for this large-scale

procurement for availing discounts and anticipating a rise in prices,

which would have meant that more funds are required to maintain the

same current assets.