A PROJECT REPORT ON

WORKING CAPITAL MANAGEMENT

EXTERNAL GUIDE Mukunda & Shiva Parkash

SESSION 2011-2013 SUBMITTED BY

INTERNAL GUIDE Parul Tandan

MD. AINUL HAQUE DSBS PGDM (HRM)-AH1112

DAYANANDA SAGAR BUSINESS SCHOOL BANGALORE. 560078

Project on Working Capital Management of Hindustan

Aeronautics Limited (HAL) (Bangalore) By Chartered Accountant (C/A) Firm.

Acknowledgment
The project of operating cycle is done in the partial fulfilment of post graduate program in management. This project has been done under the guidance of Mukunda &Shiva professor of working capital management. I am great full to him for his guidance and providing me an opportunity to understand working capital management and operating cycle.

Company profile

Hindustan Aeronautics Limited (HAL) came into existence on 1st October 1964. The Company was formed by the merger of Hindustan Aircraft Limited with Aeronautics India Limited and Aircraft Manufacturing Depot, Kanpur. The Company traces its roots to the pioneering efforts of an industrialist with extraordinary vision, the late Seth Walchand Hirachand, who set up Hindustan Aircraft Limited at Bangalore in association with the erstwhile princely State of Mysore in December 1940. The Government of India became a shareholder in March 1941 and took over the Management in 1942. Today, HAL has 19 Production Units and 10 Research & Design Centres in 8 locations in India. The Company has an impressive product track record - 15 types of Aircraft/Helicopters manufactured with in-house R & D and 14 types produced under license. HAL has manufactured over 3658 Aircraft/Helicopters, 4178 Engines, Upgraded 272 Aircraft and overhauled over 9643 Aircraft and 29775 Engines.
HAL has been successful in numerous R & D programs developed for both Defence and Civil Aviation sectors. HAL has made substantial progress in its current projects :

Advanced Light Helicopter Weapon System Integration (ALH-WSI) Tejas - Light Combat Aircraft (LCA) Intermediate Jet Trainer (IJT) Light Combat Helicopter (LCH)

Vigilance Department in HAL is ISO 9001-2008 compliant and accredited with certification. All the processes of Vigilance functioning have been codified and driven by the following Quality Policy and Quality Objectives:QUALITY POLICY Policy of the Vigilance Department of Hindustan Aeronautics Limited is to achieve customers total satisfaction through result oriented Quality Anti-Corruption Services with Trust, Integrity and Efficiency. The Vigilance Department will consistently strive to exceed the customers expectations through continual improvements by meeting all applicable Regulatory requirements. QUALITY OBJECTIVES 1. To meet Customers needs and expectations by attending to all Anti-Corruption issues judiciously and expeditiously, in a climate of absolute professional competence and Honesty by meeting all applicable Regulatory requirements. 2. To sustain and maintain the highest standard of Quality Management System in Anticorruption services in conformity with the Policies / Guidelines of Government of India, CBI, CVC and HAL, with Trust, Integrity, Efficiency and Timely completion of tasks. 3. To critically examine various Systems and Procedures of the Company to ensure their conformity to Policies and Norms of Government of India, CVC and HAL with a view to bring in transparency and expeditiousness in adherence by all employees. 4. To strive for continual improvements to achieve ultimate goal of Total Quality Management in Anti-Corruption Services.

INTRODUCTION
Working capital typically means the firms holding of current or Short-term assets such as cash, receivables, inventory and marketable securities. These items are also referred to as Circulating capital. Corporate executives devote a considerable amount of attention to the management of working capital.

Working capital definition

Working Capital refers to that part of the firms capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.

2. Types of working capital

Concept of working capital

There are two possible interpretations of working capital concept: 1. Balance sheet concept 2. Operating cycle concept

Balance sheet concept

There are two interpretations of working capital under the balance sheet concept. a. Excess of current assets over current liabilities b. Gross or total current assets. Excess of current assets over current liabilities are called the net working capital or net current assets. Working capital is really what a part of long term finance is locked in and used for supporting current activities. The balance sheet definition of working capital is meaningful only as an indication of the firms current solvency in repaying its creditors. When firms speak of shortage of working capital they in fact possibly imply scarcity of cash resources. In fund flow analysis an increase in working capital, as conventionally defined, represents employment or application of funds.

OPERATING CYCLE CONCEPT

A companys operating cycle typically consists of three primary activities: Purchasing resources, Producing the product and Distributing (selling) the product. These activities create funds flows that are both unsynchronized and uncertain. Unsynchronized because cash disbursements (for example, payments for resource purchases) usually take place before cash receipts (for example collection of receivables). They are uncertain because future sales and costs, which generate the

respective receipts and disbursements, cannot be forecasted with complete accuracy. The firm has to maintain cash balance to pay the bills as they come due. In addition, the company must invest in inventories to fill customer orders promptly. And finally, the company invests in accounts receivable to extend credit to customers. Operating cycle is equal to the length of inventory and receivable conversion periods.

OPERATING CYCLE

3) OBJECTIVE OF WORKING CAPITAL MANAGEMENT

1) Working capital objective is to keep adequate level of short term assets. 2) It converts an asset from non productive to productive one and vice-versa. 3) To establishes the relationship between current assets and current liabilities.

Two MAIN objectives of working capital management are

Determining the size of the working capital Arranging the sources of working capital

CHAIRMAN'S MESSAGE

Welcome to HAL. This website is designed to provide comprehensive and in-depth information about HAL. Our Company has spread its wings across the length and breadth of India and has made its presence felt in nearly 30 countries in the world. We are proud of our heritage, continuous growth and prosperity. Our website reflects our sense of vision - to be a significant global player in the aerospace industry. HAL culture is characterized by its commitment to put the customer first in all its activities. We believe in ensuring continual improvement in all our activities. We make whole-hearted efforts to supply products and services that conform to the highest standards of design and manufacture. Our reliable products have won the precious customers in the field known for its complex technology with zero tolerance for slightest of quality aberration. Our challenge over the years has been to adapt quickly to our customers needs and demands. Literally sky appears to be the limit for our growth. Our wide range of products includes trainer, transport and combat aircraft and helicopters, aero engines, communication and aerospace equipment. Our future products are even more fascinating: Fifth Generation Fighter Aircraft (FGFA), Intermediate Jet Trainers (IJT); Multi-role Transport Aircraft (MTA), heavy-lift helicopters, Hindustan Turbo Trainer-40 (HTT-40), Indian Multirole Helicopter (IMRH) etc. Employees of HAL are inspired by our vision and are willing to go an extra mile to create value for the company and the economy. As you surf our website, you will discover our commitment to all facets of our business: transparency, customer care, quality, financial achievements, Research and Development, employee relations and Corporate Social Responsibility. We are keen to build on our success as these are exciting times for us. You too will feel so when you finish browsing our website. (R. K. Tyagi)

Chairman

OUR VISION " To become a significant global player in the aerospace industry. ". OUR MISSION " To achieve self reliance in design, development, manufacture, upgrade and maintenance of aerospace equipment diversifying into related areas and managing the business in a climate of growing professional competence to achieve world class performance standards for global competitiveness and growth in exports. ". OUR VALUES CUSTOMER SATISFACTION We are dedicated to building a relationship with our customers where we become partners in fulfilling their mission. We strive to understand our customers' needs and to deliver products and services that fulfill and exceed all their requirements. COMMITMENT TO TOTAL QUALITY We are committed to continuous improvement of all our activities. We will supply products and services that conform to highest standards of design, manufacture, reliability, maintainability and fitness for use as desired by our customers. COST AND TIME CONSCIOUSNESS We believe that our success depends on our ability to continually reduce the cost and shorten the delivery period of our products and services. We will achieve this by eliminating waste in all activities and continuously improving all processes in every area of our work. INNOVATION AND CREATIVITY We believe in striving for improvement in every activity involved in our business by pursuing and encouraging risk-taking, experimentation and learning at all levels within the company with a view to achieving excellence and competitiveness. TRUST AND TEAM SPIRIT We believe in achieving harmony in work life through mutual trust, transparency, co-operation and a sense of belonging. We will strive for building empowered teams to work towards achieving organisational goals. RESPECT FOR THE INDIVIDUAL We value our people. We will treat each other with dignity and respect and strive for individual growth and realisation of everyone's full potential. INTEGRITY We believe in a commitment to be honest, trustworthy and fair in all our dealings. We commit to be loyal and devoted to our organisation. We will practise self discipline and own responsibility for our actions. We will comply with all requirements so as to ensure that our organisation is always worthy of trust

FUTURE PRODUCTS

In the year 1951, when HT-2 the first indigenously designed primary trainer made its first flight, it heralded the era of Research & Design at HAL This aircraft served as the back bone of IAF's training fleet for more than three decades. Subsequently, HAL's R&D capabilities have grown from strength to strength and have been harnessed to achieve greater heights of self reliance. The Advanced Light Helicopter - ALH (DHRUV) is the latest new generation helicopter designed and developed by HAL. It is under production since 2002. The test flights on Technology Demonstrators (TD-I and II) and Prototype Vehicles (PV-1 and 2) of Light Combat Aircraft - LCA (Tejas) are progressing satisfactorily. The Intermediate Jet Trainer (IJT) is undergoing test flights. In addition, HAL has successfully completed many systems updates and integration tasks. HAL has 9 Research & Design Centres engaged in the design and development of combat aircraft, helicopters, aeroengines, gas turbines, engine test beds, aircraft communication and navigation systems and mechanical system accessories. The indigenously upgraded MiG-27M aircraft has received Initial Operation Clearance (IOC) and the first batch of aircraft has been delivered. First flight test on Jaguar Nav WASS upgraded aircraft with indigenously developed mission computer with weapon delivery capabilities has been carried out and retromod of fleet has been taken up. Equipped with the latest facilities, the company is backed by high profile, highly skilled manpower with an impressive track record of more than five decades of rich experience in all disciplines of aeronautics.

Cash flow
particulare Profit before tax Net cash flow-operating activity Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 02 Mar ' 01 2,688.43 2,334.86 2,164.23 373.40 -1,720.86 -809.50 2,077.84 530.90 265.15 -297.58 220.99 20.37

Net cash used in investing activity 1,042.90 1,304.69 1,229.18 217.89 Netcash used in fin. activity Net inc/dec in cash and equivlnt Cash and equivalnt begin of year Cash and equivalnt end of year -408.96 -396.96 -366.22 348.27

-1,086.92 98.24

2,940.80 1,105.14 -56.22

19,744.56 19,646.32 16,705.52 3,757.84 3,814.06 18,657.64 19,744.56 19,646.32 4,862.98 3,757.84

Profit loss account

Mar ' 10 Income Operating income Expenses Material consumed Manufacturing expenses Personnel expenses Selling expenses Adminstrative expenses Expenses capitalised Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Other write offs Adjusted PBT Tax charges Adjusted PAT Non recurring items Other non cash adjustments Reported net profit Earnigs before appropriation Equity dividend Preference dividend Dividend tax Retained earnings 7,188.01 243.75 1,954.05 968.47 200.77 10,555.05 900.77 1,953.70 2,854.46 0.03 166.00 2,688.43 721.02 1,967.41 1,967.41 1,967.41 393.48 66.87 1,507.06 6,382.75 1,240.55 2,542.78 1,042.65 -1,116.43 10,092.31 278.39 2,199.33 2,477.72 0.30 142.55 2,334.86 595.00 1,739.86 1,739.86 1,739.86 347.98 59.14 1,332.74 5,098.98 1,068.26 1,802.69 1,220.89 -1,148.27 8,042.55 580.56 1,714.86 2,295.42 13.24 117.95 2,164.23 532.35 1,631.88 1,631.88 1,631.88 327.00 55.57 1,249.31 4,581.29 246.19 1,050.22 923.17 6,800.87 981.05 1,143.47 2,124.52 15.94 100.28 264.70 1,743.60 594.84 1,148.76 1,148.76 1,148.76 250.00 35.42 863.34 2,739.10 88.95 837.69 830.92 4,496.66 844.84 563.31 1,408.15 48.01 77.31 156.54 1,126.29 355.15 771.14 771.14 771.14 200.50 28.12 542.52 11,455.82 10,370.70 8,623.12 7,781.92 5,341.50 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06

Balance sheet
Mar ' 10 Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Sources of funds Owner's fund Equity share capital Share application money Preference share capital Reserves & surplus Loan funds Secured loans Unsecured loans Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Miscellaneous expenses not written Total Notes: Book value of unquoted investments Market value of quoted investments Contingent liabilities 230.66 44.03 19.20 42,227.34 37,880.14 33,960.48 29,258.55 21,610.36 37,978.58 37,845.98 34,930.02 30,969.62 22,870.70 4,248.76 34.16 -969.54 -1,711.07 -1,260.34 2,933.53 5,650.24 5,209.08 4,634.45 3,690.73 4.02 361.02 3.88 120.50 120.50 120.50 120.50 120.50 -

8,003.02 6,495.97 5,163.22 3,913.92 3,050.58

8,123.52 6,616.47 5,283.72 4,038.44 3,535.98

1,468.03 1,310.53 1,174.90 1,059.91 964.25 1,465.50 4,339.71 4,034.18 3,574.54 2,726.48 212.37 230.66 217.86 44.03 242.70 19.20 210.27 15.28 331.17 8.44

1,966.23 1,980.71 1,957.19 1,949.42 1,730.23 8,123.52 6,616.47 5,283.72 4,038.44 3,535.98

2,934.05 1,878.02 1,965.85 1205.00 1205.00 -

Number of equity sharesoutstanding (Lacs) 1205.00

Ratios
Mar ' 10 Mar ' 09 Per share ratios Adjusted EPS 163.27 (Rs) Adjusted 177.05 cash EPS (Rs) Reported EPS 163.27 (Rs) Reported 177.05 cash EPS (Rs) Dividend per 32.65 share Operating profit per share (Rs) 74.75 144.39 156.22 144.39 156.22 28.88 135.43 145.21 135.43 145.21 27.14 Mar ' Mar ' Mar ' 08 07 06

23.10

48.18 -

Book value (excl rev res) 510.98 per share (Rs) Book value (incl rev res) 510.98 per share (Rs.) Net operating income per share (Rs)

384.71

276.06 25.96 25.96

384.71

276.06 27.51 27.51

950.69

860.64

715.61 -

Free reserves -163.17 per share (Rs) Profitability ratios Operating margin (%) Gross profit margin (%) 7.86 6.41

-164.37

162.42

2.68 1.30

6.73 5.36

12.60 15.81 11.31 14.36

Mar ' 10 Mar ' 09 Net profit margin (%) 14.67 13.84

Mar ' Mar ' Mar ' 08 07 06 15.78 12.87 13.05

Adjusted cash margin 15.90 (%) Adjusted return on net 31.95 worth (%) Reported return on net 31.95 worth (%) Return on long term funds (%) Leverage ratios Long term debt / Equity Total debt/equity 33.09

14.97

16.92 16.95 17.01

37.53

49.05 55.09 53.51

37.53

49.05 55.09 53.51

35.29

41.21 43.56 33.21

0.11 0.11

Owners fund as % of total 100.00 source Fixed assets turnover ratio Liquidity ratios Current ratio 1.11 Current ratio 1.11 (inc. st loans) Quick ratio Inventory turnover ratio 0.67 0.68 3.91

100.00

100.00 99.90 89.68

1.84

1.66

1.68

1.45

1.00 1.00 0.72 0.99

0.97 0.97 0.72 1.00

0.94 0.94 0.71 1.08

0.94 0.94 0.72 1.11

Mar ' 10 Mar ' 09 Payout ratios Dividend payout ratio 23.39 (net profit) Dividend payout ratio 21.57 (cash profit) Earning retention ratio Cash earnings retention ratio Coverage ratios Adjusted cash flow time total debt Financial charges coverage ratio Fin. charges cov.ratio (post tax) Component ratios Material cost component 80.49 (% earnings) Selling cost Component Exports as percent of total sales 75.41 76.61 23.39

Mar ' Mar ' Mar ' 08 07 06

23.44 24.84 29.64

21.62

21.86 18.85 22.74

76.61

76.56 75.16 70.36

78.43

78.38

78.14 81.15 77.26

0.36

82,978.61 8,295.00 173.38 133.28 29.33

62,018.69 6,303.03 133.17 95.96 21.93

61.08 77.09 62.03

1.79

4.20

3.95

Mar ' 10 Mar ' 09 Import comp. in raw mat. 92.63 consumed Long term assets / total 0.04 Assets Bonus component in equity capital (%)

Mar ' Mar ' Mar ' 08 07 06 80.21 -

88.05

0.10

0.11

0.11

0.12