overview of indian tyre industry
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EXECUTIVE SUMMARY
JK TYRE has emerged as one of the leading tyre manufacturers in the country. The company has
been able to spread its presence in the most remote parts of the country as well, with the help of
some 4000 odd dealers spread throughout the length and breadth of the country. The level of
economic activity, performance of domestic automotive industry, and the fairing of the transport
sector directly influence the performance of tyre industry in India. While changes have become the
norm in passenger car segment, in the bus and truck tyre segment, its acceptance is still limited.
Bus and truck tyre changes could emerge in the long term as the quality of roads improves and the
restrictions on over loading are better enforced.
The company follows a centralized approach when it come down to the planning aspects of the
company, the major strategies of the company are decided at the head office of the company and
from there communicated to the plants situated in Rajasthan, Karnataka and Madhya Pradesh.
Another important aspect for the company is that it being a manufacturer the working capital is an
area that calls for intensive and careful introspection year on year. Hence WORKING CAPITAL
MANAGEMENT becomes a very important part of operations for the company.
The company being mostly dependent on the working capital facilities, it is maintaining very good
relationship with their banks and their working capital management is well balanced. Controlling
working capital requirement is done by the company by way of optimization of working capitalcycle and maximizing credit to creditors and minimizing credit of customers by best utilization of
resources and minimizing stock level
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INTRODUCTION
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Despite these challenges, according to CARE Research, while the industry may register a tonnage
growth of only 4.27% in FY09, the long term prospective seems to be bright. They expect the
industry to experience a CAGR of approximately 8.21% between FY08 to FY13. Automotive
companies have started experiencing increasing sales and raw material prices are stabilizing which
will boost tyre sales over the coming months. However, experts suggest there will be some time
lag before profitability picks up as tyre manufacturers are still carrying high cost inventories.
India Vs Global
The global tyre market currently is estimated at USD 70 billion while the Indian market is around
Rs. 100 million. The global market is dominated by Goodyear-Sumitomo with a share of 22%. On
the other hand, the domestic industry is dominated by MRF Ltd. Several mergers and acquisitions
have characterized the global market, in the recent past. This is essentially to acquire technology,gain wider access to markets and be competitive. Indian players are also reengineering their
businesses and looking at strategic tie-ups in this segment.
In terms of technology, radial tyre usage has been catching up at a quick pace in the global market.
Almost all the automobile segments have shifted to radial tyres and the usage of cross ply is
restricted to trucks and buses only. On the other hand, in the domestic market, the radial tyres are
being used only in the passenger car segment while the rest of them still stick to the cross ply
variety. This is because of the lower price of cross ply and its re-tradability. In addition, the poor
quality of roads in India restricts the use of such tyres.
Pricing Scenario
Pricing is influenced by the demand. Since the tyre demand has not significantly increased in the
last one year, many of the tyre companies have surplus stocks. Hence in the last 2-3 months the
tyre companies are offering discounts between 20 to 40 percent to car manufacturers, but the car
companies are trying to squeeze more discounts. The cheap imports of non-radial tyres from China
are also adding to the present woos of these tyre manufacturers.
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EXIM Scenario
The export market for India has been predominantly to the USA that accounts for nearly 30% ofexports from the country. These are mostly of the cross ply variety. However, of late Indias share
in the US market is being threatened by China and Japan. These two countries are able to offer
prices that are lower than that offered by Indian manufacturers. In addition, these two nations are
logistically better placed than India when it comes to exporting to the USA.
Domestic tyre manufacturers are also facing threat from imports from China and South Korea. The
landed cost of tyres from China is lower than the Indian price by 30%. In addition, tyres from
South Korea are imported at 30% customs duty while from other countries the duty levied is 35%.
Thus in both cases the domestic tyre manufacturers are feeling the heat.
Government Policies
The recent budget policy of the government has also not brought much relief to the tyre
manufacturers. The major issues of concern are high import duty on raw materials, ban on import
of used tyres, lack of exemption in import duty for steel and polyester tyre cords (currently being
imported) and imports of tyres from South Korea at lower duty.
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ATMA (Automotive Tyre Manufacturing Industry)
Automotive Tyre Manufacturers Association (ATMA) was set up in 1975, registered under The
Companies Act, as the representative body of automotive tyre industry in India. 8 large tyrecompanies representing over 90% of production of tyres in the country are members of the
Association.
The Association with the guidance of the Managing Committee functions through various
committees set up, consisting of different disciplines, such as, Marketing, Export, Purchase (Raw
Material), Taxation, Technical etc. Day to day functioning of the Association is managed by the
Secretariat of the Association headed by the Director General.
The primary function of the Association is to be a conduit between Government Departments and
the tyre companies in having two way communications. The Association projects the views of theindustry on various subjects to respective Government departments. Conversely, the expectations
of the Government from tyre industry are conveyed to tyre companies. Further, the Association
briefs its members of the changes in Government Policy on issues related to Indian economy and
industry in general and tyre industry in particular. Frequent meetings are held with the
Government to sort out problems being faced by the industry.
The Association also has an extensive information bank on the tyre industry which is available for
tapping not only for Government but those who are interested in tyre industry related
developments.
The Association regularly publishes data on production and export of various categories of tyres.
Besides, the Association prepares Status notes on various subjects which are of relevance to tyre
industry, such as, Tyre Retreading Industry, Regional Trade Agreements & Rules of Origin, Anti
Dumping, etc.
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FINANCIAL YEAR
Financial Year 2009-2010 (Est.)
Turnover of Indian Tyre Industry Rs. 25,000 Crores
Tyre Production (Tonnage) 13.50 lakh M.T.
Tyre Production All Categories (Nos.) 971 Lakh
Tyre Export from India (Value) : Rs. 3000 (est) crores
Number of tyre companies: 36
Industry Concentration 10 Large tyre companies account for over 95%
of total tyre production.
Radialisation Level - Current
(as a % of total tyre production)
Passenger Car tyres: 98%
Light Commercial Vehicles: 18%
Heavy Vehicles ( Truck & Bus ): 12%
Government Policy
Tyre Industry De licensed since 1987
Export (of tyres and tubes) Freely allowed
Import (of new tyres and tubes) Freely allowed.
Import Policy for Used / Retreaded tyres: Restricted from April, 2006
Source: www.atma.com
COMPANY PROFILE
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YEAR EVENTS
1951 The company was incorporated as a private limited company in West Bengal in 14th
February, 1951. Until 31st March 1970, the company was engaged in themanaging agency business. Thereafter, the company decided to undertake
manufacturing activities and obtained a letter of intent in February 1972 for the
manufacture of automobile tyres and tubes.
The letter of intent was converted into an industrial license in February 1974 for the
manufacture of 4 lakh nos. each automobile tyre and tubes per annum. The
company was converted into a public limited company on 1st April 1974. The
manufacturing project was promoted by Straw Products Ltd and J.K. Synthetics
Ltd.
The co. entered into technical collaboration with General Tire International Co.,
U.S.A., (a subsidiary of General Tire &Rubber Co., U.S.A.) for technical services
for a period of 5years and sales agreement for the supply of technical know-how,
engineering and documentation for operational facilities (for a period of 8 years
from 23.8.73).
Under the collaboration agreement, the Company has the right to use on its
products the wording Made in collaboration with General Tire International Co.,
USA.
1982 The company's technical collaboration agreement with General Tire International Co., was
renewed for a further period of 5years.
1987 The overall working resulted in substantial profits despite a 51-days strike as well as go-
slow from 14th October. The strike had since then been resolved and amicable
settlement was reached. Efforts were on to launch a new pattern in steel belted
radial tyres.
1988 New steel radial tyres for Maruti Gypsy and Tata mobile were introduced. The Company
proposed to incur an expenditure of Rs.300 lakhs for installation of latest and
sophisticated R&D equipment.
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1989 Several new patterns and sizes of tyres were introduced including a semi-lug Nylon Truck
tyre, all of which were well received in the market.
1991 Handeep Investment, Ltd., Hidrive Finance Ltd., Panchanan Investment Ltd., and RadialFinance Ltd., J. K. International Ltd., Shivdham Properties Ltd., and J.K. Asia
Pacific, Ltd., are subsidiaries of the Company.
1992 The J.K. International division expanded its activities by opening its office in Moscow
besides starting Company's subsidiaries in U.K. & Honkong. The radial tyres for
tractors and business launched in the previous year were well received.
1993 New radial tyres Brute' and `Ultima' were introduced. The Company was in the process of
developing steel belted radial tyres for the prestigious cars in the Mercedes Benz,
Peugeot, Daewoo race and Opel Astra. A new pattern developed for bus and trucks
`PE-T8' was well received in the market.
1994 The company maintained its pace of growth, despite steep rise in raw material and input
costs and competition. The Company effected an all round cost reduction and
attained higher capacity utilisation at both the tyre plants at Jaykaygram and
Banmore.
The T-rated Ultima tyres launched for new generation cars found its acceptance in
DCM Daewoo's `Ceilo'. Also J.K. Steel radial was chosen for Mercedes Benz
India.
The Company undertook to develop steel radials for GM's `Astra'. PAL's Peugekot'
FIAT's, `UNO' and M & M's `Ford'.
The Company launched a premium truck tyre `Jet Trak' - 39 which was introduced
to meet the need of the heavy load market. The new tractor rear tyre `SONA' was
well received in the market.
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1996 During this period, a new Car tyre Jet Drive XS, the widest nylon car tyre for Maruti 800
was launched. Along with new semi-lug and heavy duty lug tyre for trucks, a new
lug tyre for super heavy load applications Jet Trak 39 was also introduced.
In the Radial category, Ultima XR Radial, a terrain tyre was introduced. All these
products were well received in the market.
Both the tyre plants operated to full capacity. In line with JK tyre, the radials unit
introduced the dual contact high traction and high performance Aquasonic steel
radial car tyre. The unit also developed India's first and only H-rated ultima Xs'
especially for Mercides - Benz Cars.
2000 The Company proposes to reduce its debt by Rs 125 crore in the current fiscal from the
current level of Rs 635 crore by way of loan repayment.
The Company and Indian Oil Corporation have entered into a marketing alliance
for installing digital air pressure gauges and setting up sales and services outlets at
IOC petrol stations throughout the country.
2001 Raghupati Singhania managing director of J K Industries has been appointed the 19th
Chairman of Automotive Tyre Manufacturers Association, the representative body of
tyre industry in India.
2002 J.K.Industries Ltd has informed BSE that CRISIL has assigned a P1+ rating to the
Commercial Paper program of the company.
2003 J.K. Industries Ltd (JKI) has a new Marketing Director in Mr Ajay Kapila. Before joining
JKI, Mr Kapila was Senior Vice-President (Sales and Marketing) at Kinetic
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Engineering Ltd. He was also Director on board and operational head of Kinetic's
direct selling arm - Kinetic Marketing Services Ltd.
Completes its comprehensive restructuring exercise of businesses that leads to its
emergence as a pure automotive tyre company. Along with the de-merger of its
non-tyre business, Sugar and Agri Seeds, into separate companies namely JK SugarLtd and JK Agri-Genetics Ltd. JKI also completes the merger of Vikrant Tyres Ltd
with itself.
J.K.Industries delists from Jaipur Stock Exchange divested its wholly-owned
subsidiary called J.K. Drugs and Pharmaceuticals Ltd to TEVA Pharmaceuticals of
Israel.
2004 JK Industries Ltd has informed that its securities are delisted from Delhi Stock Exchange
Association Ltd (DSE) w.e.f. January 29, 2004.
2007 JK Industries Ltd has informed that the name of the Company has been changed from J K
Industries Ltd to JK Tyre & Industries Ltd w.e.f. April 02, 2007.
Company name has been changed from JK Industries Ltd to JK Tyre & Industries
Ltd.
2008 The company has issued rights in the ratio of 1:3 at a premium of Rs.75 per Share.
VISION
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To be amongst the most admired companies in India, committed to excellence
MISSION
Be a Customer Obsessed Company - Customer First 24x7
No.1 Tyre Brand in India
Most profitable Tyre Company in India
Motivated and Committed team for excellence in performance
Be a Green Company
Deliver Enhanced Value to all stakeholders
Enhance global presence through Acquisition / JV / Strategic Partnerships.
Core Values
"Excellence comes not from mere words or procedures. It comes from an urge to strive and deliver
the best. A mindset that says, When it is good enough, improve it. It is a way of thinking that
comes only from a power within."
Caring for people.
Integrity including intellectual honesty, openness, fairness & trust.
Commitment to excellence.
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International Operations
JK Tyre is one of the largest tyre exporters from India with a worldwide customer base in over 80
countries across all 6 continents. International sales operate through a strong and dedicated
distribution network fully supported by the company's technical team in terms of continued
product development to meet specific market needs.
Besides India, JK Tyre has enhanced its global foot print with the acquisition of a Mexican tyre
major Tornel in 2008 to further strengthen JK Tyres resolve for increased presence in the
NAFTA trade bloc and emerging economies of Central and South America where it has been
exporting tyres from India in large volumes for over twenty years.
In addition to Mexico, to meet the increasing demand for our reputed tyres in the discerning global
tyre markets, we have entered into sourcing arrangements with tyre companies in China Vietnam
and Sri Lanka for various products including Truck Radial tyres and Bias Truck / Bus and LCV
tyres.
As per the Automotive Tyre Manufacturers Association (ATMA), for the FY 2008-09 (Apr-Mar)
in terms of FOB value JK Tyre accounted for about 22 % of the total tyre exports. We were also
the largest exporter of Truck / Bus tyres from India.
JK Tyre products are marketed under the 'JK Tyre' and 'Vikrant' brands and compete with the best
international players. Our Bias range of products commands a premium price and image across
major bias global markets and conform to international quality certifications such as TS 16949,
'DOT'(USA), 'E' mark (Europe), 'INMETRO (Brazil), 'GCC' (Middle East Gulf), SONCAP
(Nigeria), 'ITS' (Kenya), SNI (Indonesia) etc.
In recognition of JKTILs exports efforts, we have received numerous recognitions and awards by
both the central and state governments besides Indian industry.
JK Tyre and Industries have enhanced their global reach by taking over tornel a renowned
Mexican Tyre Company. Tornel has a widespread network of distributors and sales outlets across
Mexico, which will help to consolidate the marketing position of JK Tyre, already a large exporter
to Central America.
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Accolades
Jan 04, 2010
Hall of Fame- Golden Steering Wheel 2010
Dec 31, 2009
JD Power customer satisfaction study 2009
Dec 24, 2009
JK Tyre- Super Brand 2009-10
Dec 14, 2009
National Energy Conservation Award-2009
Dec 14, 2009
Rajasthan Energy Conservation Award-2009
Dec 10, 2009
CII Water Management Award 2009
Dec 01, 2009
CAPEXIL Top Export Award for the year 2008 - 2009
Nov 20, 2009
CII Energy Management Award 2009
Apr 29, 2009
JK Tyre produces revolutionary Ultra-Large OTR Tyres
Mar 21, 2009
JK Tyre wins the National award for excellence in Cost Management
Feb 27, 2009
Excellence Award For Outstanding Marketing
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PROJECT PROFILE
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OBJECTIVES
Objectives act as compass and provide guidelines for a study; this report on JK
TYRES has an underlying purpose stated as follows-
To study the TYRE Industry for the past three years, this gives a glimpse of
the recent trend in the industry.
To analyze the performance of different JK TYRE using quantitative
techniques, that includes ratio analysis
SWOT analysis of JK TYRES that explains various factors that affect the
TYRE industry. This also reveals the opportunities where TRYE industry can
tap and grow and defend their market share.
Analyzing the working capital requirement for JK TYRE.
Analyzing the best sources of funds for fulfilling the requirements of
working capital management.
Scope
The study of Ratio analysis of the company and its competitor states the positioning of the
company in comparison with its competitors from different aspects.
WORKING CAPITAL MANAGENT is an integral part of any firms short term financial
strategy. Thus the project undertaken intends to study the current policies of WORKING
CAPITAL MANAGENT that are followed by the. The study intends to talk in detail about the
current assets and their importance to the smooth functioning of the . At the same time it also
highlights the necessity of managing the current liabilities.
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METHODOLOGY:
The methodology opted for the project is completely dependent on the type of data being dealt
with and also upon the fact that is being analyzed. The methodology may be different for different
parts of the project depending upon the features being looked into. It is being explained below:
a. The project deals with the comparative Ratio analysis of JK TYRES with its closest competitor
MRF.
b. The next part of the study deals with the working capital management of the company by
making use of financial statement analysis. The data for this is obtained through the secondary
sources. The author has determined the operating and cash conversioncycle for the company
analyzing the financial statements. The project also takes various determinants of working
capital management into consideration and ascertains the impact it has for company.
c. The last part of this study talks about the working capital management, in this case also the
author has gone ahead with some discussions with the officials to understand the financing of
the working capital at JK TYRE, and based upon the findings certain suggestions have been
made regarding what other sources of finance that the company can go in for or which sources
the company should focus on (the ones that are the most profitable for the company).
DATABASES
The Study is based mainly on secondary data, where the information is collectedfrom the different sources. Sources include some of the websites, like jktyre, mrf,
ATMA etc.
Also the Capitaline database was approached for the various financial information
and latest happenings around the tyre industry. Also, some articles and surveys
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shall be summarized for their analysis and observing the trend. A detailed
reference list is attached towards the end of the report.
LITERATURE REVIEW:
1. Padachi talks about how a well designed and well implemented working capital managementcan positively contribute to the creation of a firms value. This paper examines the trends in
working capital management and how it impacts the performance of the firm. The paper examines
the trends in working capital needs and profitability of firms, to identify the reasons for anysignificant differences within the industries. It makes use of return on assets as the dependent
variable, as it is the measure of profitability. This study is based on the investigations carried out
on small manufacturing firms of MAURITIOUS. The relation between working capitalmanagement and corporate profitability is investigated using a sample of 58 small manufacturing
firms, using the data for the period 1998-2003. The author uses regression and the results show
that high investment in inventories and receivables is associated with lower profitability.
The key variables used are as follows:
1. Inventories days 2. Accounts receivables days 3. Accounts payable days
4. Cash conversion cycle
The paper also talks about the previous empirical work that establishes a strong significant
relationship between working capital management and profitability. The research paper alsoestablishes that there is an increasing trend in the short term component of working capital finance.
2. Narasimhan and Murty talks about the RETURN ON CAPAITAL EMPLOYED. This research
paper stresses on the need for many industries to improve their return on capital employed byfocusing on some critical areas such as cost containment, efficiency of working capital and by
lowering the investments in working capital finance.
Apart from the two distinct studies the author has also cited the findings of some other researches,
these researches and their findings proved to be building block for the project. The study
conducted by SMITH (1980) indicated that the working capital management plays a importantrole in the profitability and the value of a firm.
Most of the researches pertaining to the working capital management have been conducted indeveloped countries and only a handful has been carried in INDIA. These are summarized here.
BHAYANI (2004) had conducted a study on the working capital and profitability of the cement
industry and he found out that the profitability is highly influenced by the working capital.
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P.K. CHAKRABORTY (2005) & A.K. MALIK & D.SUR (1998, 1999) had conducted a studyto understand the effect of working capital management and profitability.
As is clear from all the above cited studies no study directly pertaining to the tyre industry and
working capital management has been carried out so with this view the author tries to apply the
above mentioned results in the tyre industry to understand its impact on the tyre industry.
INDUSTRY ANALYSIS
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SWOT ANALISIS
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SWOT ANALYSIS
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STREANGTH
Strong brand image
Very large distribution channel
Large product length and width
Economies of scale due to optimum capacity utilization
Collaboration with vikrant
Strong financial position
WEAKNESS
Less brand awareness
OPPORTUNITIES
Growing middle class population
High growth potential in exports in Europe
THREATS
Entry of new players with newer and better technologies
So many close competitions like MRF, APPOLO, BIRLA etc
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Porter five forces analysis
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Entry Barriers: High
The entry barriers are high for the tyre industry.
It is a highly capital intensive industry. A plant
with an annual capacity of 1.5 million cross-ply
tyres costs between Rs. 4,000 and Rs. 5,000
million. A similar plant producing radial tyres
costs Rs. 8,000 million.
Bargaining Power of the
Suppliers: High
The tyre industry consumes
nearly 50% of the natural
rubber produced in the
country. The price of natural
rubber is controlled by Rubber
Control Board and the
domestic prices of natural
rubber have registered a
significant increase in recent
times.
Bargaining Power of the Buyers:
High
The OEMs have total control over
prices. In fact, the OEMs faced
with declining profitability have
also reduced the number of
component suppliers to make the
supply chain more efficient.
Inter Firm Rivalry: Low
The tyre industry in India is
fairly concentrated, with the
top eight companies
accounting for more than
80% of the total production of
tyres.
Threat of Substitutes: Low but Increasing
During the FY2002, over 1,10,000 passenger car tyres were
imported. This constitutes over 2% of total radial passenger car
tyre production in the country. However, with the reduction of
peak custom duty, the import of tyres is likely to increase.
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COMPANY ANALYSIS
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Ratio analysis
Debt-Equity Ratio
MRF: The ratio ranges between 0.7 and 0.95 in past 3 years. This is a good signfor the company as debt is less than equity.
JK tyres: The D/E ratio is very high about 2.2 to 2.4. This is a negative sign forthe company. The company has to look again their policies so as to bring down
the debts.
The debt to equity ratio of JK TYRES is much more then that of MRF which iseven more than double of MRF. This is because of the high debts of the company.
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FIGURE 1: Debt-equity ratio
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Current Ratio
The current ratio is a financial ratio that measures whether or not a firm hasenough resources to pay its debts over the next 12 months. Here mrf tyres are
proving to be efficient. With high current ratio, it is clear that they are managing
their assets and liabilities better than Jk tyres. Reverse is the case with jk tyres.They have current ratio less than 1 an all the 3 years.
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FIGURE 2: current ratio
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Inventory Ratio
As far as inventories are concerned, jk tyres have more inventory than Mrf. But
since the current ratio is less than 1 for jk tyres, this seems that the entire extrainventory is gathered by loans and other similar ways. Whereas, mrf tyres have
lesser inventory ratio. This may be due to less acquisition of inventory by loans,
etc.
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FIGURE 3: inventory ratio
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Debtors turnover Ratio
This ratio indicates how well debtors are being collected. If debtors are notcollected reasonably in accordance with their terms, company should rethink its
collection policy. If debtors are excessively slow in being converted to cash,
liquidity will be severely affected. . Here mrf tyres are proving to be efficient than
JK Tyres. Jk Tyre is constantly increasing in its collection policy, this will resultin increase in debtors turnover ratio.
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FIGURE 4: Debtor turnover ratio
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Interest Coverage Ratio
The interest coverage ratio is used to determine how easily a company can payinterest expenses on outstanding debt. Here also mrf tyres are winning the round.
With ratio in the range of 4 to 7, this seems to be better than jk tyres whose ratio
is between 1 and 2.
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FIGURE 5: Interest coverage ratio
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RONW (%)
This time jk tyres have shown a better performance no matter once. But here also
mrf tyres is showing great piece of consistency. They are getting better returns ascompared with condition of jk tyres
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FIGURE 6: RONW (%)
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Debtors Velocity (Days)
Debt collection period is the period over which the debtors are collected on an
average basis. It indicates the rapidity or slowness with which the money is
collected from debtors. Here MRF velocity of debtors has increased from 2007 to2009, which shows that it is not good sign for MRF whereas JK Tyre has less
debtors velocity than MRF and therefore they are able to convert their debtors
into cash in less time than MRF.
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FIGURE 7: debtors velocity (days)
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Creditors Velocity (Days)
Credit collection period is the period over which the creditors are paid on an
average basis. It indicates the rapidity or slowness with which the money is being
paid to creditors. Both JK Tyre and MRF, creditors velocity has increased from
2007 to 2009 but JK Tyre shows higher velocity in each year than MRF, which
shows that they are blocking creditors for long time and utilizing that cash in other
current activities.
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FIGURE 8: creditors velocity (days)
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Overall compare
1. MRF:- they have good policies running under there . Keeping the inventory low, they are
managing their debts and liabilities quite brilliantly. Apart from comparatively little bit
inferior in debtors and creditors days comparison, they seem to be working really well in
managing the companys finances
2. JK Tyres:- they are struggling with their policies. With more debts than equity and more
liabilities than assets, they seem to be dealing with loans. Their polity of borrowing funds
seems to be not working and an immediate steps need to be taken. However, debtors and
creditors days comparison is going in favor of them but still they are not able to manage
the finances.
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WORKING CAPITAL MANAGEMENT
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WORKING CAPITAL MANAGEMENT:
Management of a firms short term financing is called working capital management. It involves
striking an appropriate balance between a firm's short-term assets and its short-term liabilities.
Efficient working capital management ensures that the firms operations are not affected due to
lack of working capital and it is able to pay off its short term debts and upcoming expenses.
Working capital has two concepts - gross and net.
Gross working capital includes firms total current assets. Current assets can be defined as cash
and other assets that are expected to be converted into cash or consumed in the production of
goods or rendering of services in the normal course of business.
Net working capital is the difference between current assets and current liabilities. Current
liabilities comprise of all short-term obligations admitted in the normal course of business like
purchase of raw material, stores etc., advances received from customers, services already received
but not paid for and the monetary value of facilities already obtained but not paid for.
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FIGURE 9 WORKING CAPITAL MANAGEMENT
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WORKING CAPITAL CYCLE:
Working capital cycle represents how a firms current assets flow through. In a working capital
cycle, cash goes through many stages. Some forms of current assets are more liquid than others, so
it becomes necessary to study the working capital cycle in order to make sure that there is an
appropriate risk return trade off i.e. liquidity-profitability trade-off.
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Cash
A/C
payabl
e
Raw
material
Finished
goods
Wages
payable
Labo
rReceivables
Selling &
Distribut
ion
FIGURE 10 - WORKINGCAPITALCYCLE
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TYPES OF WORKING CAPITAL:
Permanent and variable working capital
The level of current assets required in the company does not always remain the same. It keeps on
changing from time to time. But there is always a minimum level of current assets that is required
continuously to carry on the operations of the firm. This minimum level of current assets is called
the permanent working capital.
The requirement for working capital over and above permanent working capital changes over time
depending on the level of production, sales, manufacturing and other costs. For instance, extra
inventory is required in peak periods of sale. This extra working capital that keeps on changing
depending on other factors is called variable working capital.
In the figure 10, a firms permanent and temporary working capital is shown. We can see that
permanent working capital is stable over a period of time but the variable working capital is
changing. The permanent working capital can also be increasing or decreasing according to firms
performance.
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Time
Am
ountofworkingcapital
Permanent
Variable
FIGURE 11 PERMANENTANDTEMPORARYWORKINGCAPITAL
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THE IMPORTANCE OF WORKING CAPITAL
MANAGEMENT:
Working capital refers to the resources of the firm that are used to conduct operations. Thus
working capital is a part of the investment by the firm and associated with this is an opportunity
cost i.e. the cost associated with sacrificing the next best alternative. If a department is operating
with more working capital than is necessary, this over-investment represents an unnecessary cost.
From a department's point of view, excess working capital means operating inefficiencies. In
addition, unnecessary working capital increases the amount of the capital charge which
departments are required to meet.
On the contrary, insufficient working capital can also affect the liquidity of the firm adversely e.g.
overtrading.
Overtrading It is a phenomenon when there is insufficient working capital and increased sales,
which results in over-stretching of the financial resources of the business. This is called
overtrading.
Thus good management of working capital is required to generate cash which help improve profits
and reduce risks. But the cost of providing credit to customers and holding stocks can represent a
substantial proportion of a firm's total profits. With shorter debtors cycle and reduced inventory
the business will generate more cash or it will need to borrow less money to fund working capital.
This results in reduced cost of bank interest and additional money to support additional sales
growth or investment. Similarly, longer creditors payment period or an increased credit limit,
helps financing future sales. It also helps improve the liquidity position of the firm.
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FACTORS INFLUENCING WORKING CAPITAL
OF A FIRM:
Volume of Sales As the sales grow the currents assets of a firm also grow, hence the firm
requires a higher working capital.Seasonal / Cyclical Factors Seasonal fluctuations of sales affect the variable working capital of
the firm. Thus during peak season, there is a higher need for working capital.
Technological Developments With better technologies at its disposable a firm can operate
efficiently with less working capital. Hence technological developments reduce the need for
working capital.
Firms Policies Every firm has its own working capital policies. A firm which has an aggressive
collection policy will have lesser amounts blocked in receivables hence would have less working
capital.
Size and activities of the firm Larger firms with many resources of funds need less working
capital as compared to total assets or sales. Also, firms that provide services do not require
inventories. Hence have a lower need of working capital.
Availability of credit If credit is available readily then the firm requires less cash at hand. If
short term resources are not available then the firm needs to maintain larger liquid balances of cash
equivalents.
Attitude towards profits and risk Large amount current assets tend to lower profit. Firms
which are keen on achieving higher profits normally manage liquid assets aggressively and vice-
versa. Conversely, greater working capital lowers overall risk. Hence firms which are risk averse
normally have higher working capital.
FIGURE 12 EFFECTOFWORKINGCAPITALONDEGREEOFRISK
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FIGURE 13 EFFECTOFWORKINGCAPITALONPROFITS/RETURNS
APPROACHES TO WORKING CAPITAL
MANAGEMENT:
The objective of working capital management is to maintain the optimum balance of each of the
working capital components. This would enable the firm to hold some amount of liquid cash at
hand. However, such cash may be "invested" in other assets or in reducing other liabilities.
Working capital management takes place on two levels:
Ratio analysis can be used to monitor overall trends in working capital and to identify areas
requiring closer management.
The individual components of working capital can be effectively managed by using various
techniques and strategies.
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WORKING CAPITAL AT J K TYRE
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WORKING CAPITAL ANALYSIS:
This section analyses the working capital ratios that are obtained from the financial statements of
the Organization. In this section the author intends to calculate various ratios for the Organizationand accordingly talk about how the company fares in that regard in comparison to other companies
from the same market.
OPERATING CYCLE
The need of working capital to run the day to day business activities cannot be overemphasized; all
the firms aim at maximizing the wealth of its shareholders. In its endeavor to do so, a firm should
earn a sufficient return from its operations. Earning a steady amount of profit requires successful
sales activity. The firm has to invest enough funds in current assets for generating sales current
assets are needed because sales dont convert into cash immediately. There is always some
Operating Cycle involved in the conversion of sales in to cash.
Operating Cycle is the time duration required to convert the sales, after the conversion of
resources into inventories, into cash. The operating cycle for a manufacturer like JK TYRE
involves three phases:
Acquisition of resources: such as raw materials, labor, power and fuel etc.
Manufacture of the product: This includes the conversion of raw material into work in progress,
into finished goods.Sale of the product: either for cash or for credit. Credit sales create account receivables for
collection.
The length of the operating period for a firm is the sum of:
1. Inventory conversion period
2. Debtors conversion period
The sum of the above two items is equal to the gross operating cycle, when the value of the
creditors deferral period id subtracted from the gross operating cycle we get the net operating
cycle.
A short cash conversion cycle is a sign of good working capital management. Conversely, a long
cash conversion cycle indicates that capital is tied up while the business waits for customers to
pay.
It is quite possible for a business to have a negative cash conversion cycle, i.e. receiving payment
from customers before it has to pay suppliers. Examples are typically companies which employ
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JUST IN TIME practices such as Dell and companies which buy on extended credit terms and sell
for cash, such as Tesco.
The table below gives a brief summary for the various periods for JK TYRE that helps to find out
the operating cycle for the Organization.
PARTICULARS VALUE(IN DAYS)
Number of days of inventory 38.29
Number of days of receivables 32.23
Number of days of payables 51.79
Gross operating cycle 70.51
Net operating cycle 18.73
Table 1: operating cycle for JK tyres
As the table above shows that the company makes good use of the method of deferral payments by
having a period well in excess of the receivables period. Hence the company can be said to have
adopted the approach of always holding the payments for as long as possible while receiving its
payment at the earliest. But the duration of around 2.5 months of gross operating cycle can be
attributed to the fact that the company follows the approach of buying in bulk, some raw materialsfor tyres, when the prices are low and then using the same for the periods to come, hence this may
be one of the many reason why such operating cycle has been obtained. This large time period is
the potential source of improvement as far as the author is concerned. On the other hand the fact
that the company follows a ad-hoc approach as far as the dealers are concerned also enables it have
a receivables period that is acceptable but if the company decides to give credit to the dealers then
this can be a potential source where the company can look to improve big time.
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FACTORS INFLUENCING WORKING CAPITALOF JK TYRE:
1. Volume of Sales As the sales grow the currents assets of a firm also grow, hence the firm
requires a higher working capital. As is evident from figure no.5 we can see that the turnover is
growing for the company also from the company records we can see that the sales have gone up
over the last decade, hence we can say that the requirements for working capital at JK TYRE has
also risen. This symbolizes the fact the firm must preplan for its current assets in order to continue
with its growth. As it is a growing firm hence JK needs to invest in fixed assets so as to sustain the
growth, this in turn leads to more investments in current assets, hence to be able to sustain this
growth the company needs continuous funding.
2. Seasonal / Cyclical Factors Seasonal fluctuations of sales affect the variable working capital
of the firm. Thus during peak season, there is a higher need for working capital. This condition is
generally not experienced by the company but the cyclical factors like availability of raw materials
does affect the production of the company. Hence these fluctuations also effect the working capital
requirements of the firm.
3. Technological Developments With better technologies at its disposable a firm can operateefficiently with less working capital. Hence technological developments reduce the need for
working capital. JK TYRE in this regard is very well facilitated by its own R&D institute
HASTERI which helps the company to produce niche products and the research also helps with
new initiatives in rubber chemistry, nano technology, testing etc. which helps the company in
reducing the working capital requirements of the firm with constant innovations and being
technologically very advanced.
4. Firms Policies Every firm has its own working capital policies. A firm which has an
aggressive collection policy will have lesser amounts blocked in receivables hence would have less
working capital. With JK TYRE the scene is very much similar as the company follows a ad-hocand approach and generally works on advance basis with the dealer network spread throughout the
country. Hence the receivables are very less, hence this lowers down the working capital
requirements of the company but at the same time it takes away the possibility for the company to
be able to have a greater number of sales by giving out credit
.
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5. Size and activities of the firm Larger firms with many resources of funds need less working
capital as compared to total assets or sales. Also, firms that provide services do not requireinventories. Hence have a lower need of working capital. JK TYRE operations are done on a very
large scale with a annual capacity to manufacture around 9 million tyres per annum the company
requires large amount of funds, but on the same hand makes use of only a limited number of
sources of working capital finance , this adds to the working capital requirements for the firm.
6. Availability of credit If credit is available readily then the firm requires less cash at hand. If
short term resources are not available then the firm needs to maintain larger liquid balances of cash
equivalents. JK TYRE makes use of a facility that is called cash credit on a large extent hence the
company doesnt require large amount of cash in hand which can also be seen from the balance
sheet which clearly shows that the cash in hand for the firm for the year 2007-09 is Rs. 41.99crores, while it was slightly under Rs. 30 crores for the year 2006-07.
7. Attitude towards profits and risk Large amount current assets tend to lower profit. Firms
which are keen on achieving higher profits normally manage liquid assets aggressively and vice-
versa. Conversely, greater working capital lowers overall risk. Hence firms which are risk averse
normally have higher working capital.
Liquidity means the ease of conversion into cash. Liquidity management refers to the decisions
regarding maintaining the level of current assets in such a way that company has a strong enough
liquidity position and it has a good overall profitability also.
Holding current assets at a higher level, especially cash strengthens the firms liquidity position
but it also reduces the firms profitability. So there has to be a risk return trade-off between the
liquidity and profitability. Current assets should always be in excess of current liabilities so as to
ensure meeting the liabilities even if we are not able to liquidate all our assets. So it is a
conventional rule to maintain the level of current assets twice the level of current liabilities.
While maintaining a level of current assets, it should be always viewed in comparison to its
liabilities. A weak liquidity position poses a threat to the solvency of the company. Whereas
excess liquidity will result in tying up a lot more cash than optimum required. So current assetsshould be always maintained at such a level that firms short term creditors can rest assured that
the firm will be able to pay off their debt only with its current assets.
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The company with its policy of buying the major raw material on a daily basis and also with the
help of the recently implemented ERP solution has been able to plan its production to a very large
extent this has helped the company to also curb on the inventory levels required to be maintained,
it has also helped the Organization in lowering down the average value of days sales outstanding.
It has also helped to improve the logistics control and planning. Hence keeping this fact in mind
the company has been able to cut down on the current assets to some extend but still some scope
for improvement is still seen by the author.
This brings to light one of the most important aspects of any firm that is whether the company
follows an aggressive working capital policy or one that is highly conservative. These policies
involve a risk return trade off. The conservative policy refers to lower return and risk, while anaggressive policy produces more return with more risk, from the ratios calculated above we can
say that for the last year the policy of the company can be classified as one that was very
aggressive as the levels of current assets were low as can be seen from the current ratio, while for
the remaining years also the company has followed a more aggressive policy. In the past couple of
years this policy has also been benefitted by the implementation of the ERP solution.
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WORKING CAPITAL NEEDS:
Whenever any firm calculates working capital requirements the concept of operating cycle of the
firm plays a very important role. While there are other methods also that the company may look
forward to while determining its working capital requirements, these methods are:
1. Current assets holding period: this method is again based on the operating cycle, in this
method the working capital needs are estimated on the basis of average holding period of
the current assets of the company and then relating them to the costs.
2. Ratio of sales: this method is based on the assumption that the current asset value varies
with the amount of sales.
3. Ratio of fixed investment: this method calculates the working capital requirements as a
percentage of fixed investment.
At JK TYRES the method that is generally utilized is the method of current assets holding period.
In this method the company based upon its previous periods for current asset holding (in the
periods gone by) the working capital requirements for the coming period is generated and based
upon that the requirements are determined.
This method will become more clear from the following calculations where the author tries to
determine the working capital needs based on the financials of the company reported for the 18
month period from October 2007- march 2009. (The calculations have been shown in the
annexure)
For the above mentioned period the value for the various holding have been summarized in the
table given below and then the value has been obtained by multiplying the holding days with thevalue of daily consumption, in case of the debtors the value has been multiplied with the daily
sales:
(in days) 2007-09
RM-IMPORTED 25.09
RM-INDIGINIOUS 18.43
RM TOTAL 20.99
WIP 3.31
FG 30.11S & S 70.11
DEBTORS CONVERSION PERIOD - DOMESTIC 40.41
- EXPORT 90.27
OPERATING CASH 5.02
Table 2: Current Assets Turnover Days
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(in Rs. Crores) 2007-09
RM-IMPORTED 51.57
RM-INDIGINIOUS 76.97
RM TOTAL 128.54
WIP 25.63
FG 237.18
S & S 21.54
DEBTORS DOMESTIC 350.02
- EXPORT 123.35
OPERATING CASH 41.99
Table 3: Working Capital Need in Rupees
Upon the addition of all these values the company gets an estimate of the amount of working
capital that it may require in the coming period. The company to be on a safer side always goes onincreasing the working capital amount by some value so as to overcome any inflationary or other
adverse conditions the company may be subjected to in the future. Hence on an estimate the
company will be requiring around Rs. 1100 as working capital. Along with these calculations the
company also establishes some holding period estimates and then based upon the difference
between the previous period actual and the projections the total value is obtained.
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FUNDS FLOW STATEMENT FOR JK TYRE:
SOURCES
1. FUNDS FROM OPERATIONS 138.82. INCREASE IN LONG TERM LOANS 186.9
3. INCREASE IN SHARE CAPITAL 87.3
4. DECREASE IN OTHER ASSETS 3.0
415.9
USES
1. DIVIDENDS 13.0
2. ADDITIONS TO FIXED ASSETS 114.3
3. INCREASE IN INVESTMENTS 27.2
4. INCREASE IN CAPITAL WORK INPROGRESS 219.9
374.3
NET INCREASE IN WORKING CAPITAL 41.6
Table 4: Funds Flow Statement For J K TYRE
The table above shows that how the company was able to fund its requirements it clearly states
how the funds were utilized and from where were they obtained. This funds flow has been
established on a working capital basis. This statement is the one that is generally looked into by
the various bankers to determine whether the borrowers are able to maintain their minimumworking capital needs. This kind of statement is also generated at JK TYRE and is made available
to various banks that provide working capital loans to the company.
To study the accuracy of the net change as disclosed by the funds flow statement the author has
prepared a schedule of changes in working capital that is shown in the following table.
SCHEDULE FOR CHANGES IN WORKING CAPITAL
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CHANGE IN WORKING CAPITAL increase decrease
CURRENT ASSETS
RAW MATERIALS 24.7
STORES AND SPARES 9.5FINISHED GOODS 66.3
STOCK IN PROCESS 6.8
DEBTS OVER SIX MONTHS 9.1
OTHER DEBTS 2.2
INTEREST ACCRUED ON INVESTMENTS 0.1
CASH ON HAND 0.1
REMMITANCES IN TRANSIT AND
CHEQUES ON HAND 14.2
BALANCES WITH SCHEDULED BANKS 1.4
LOANS AND ADVANCES 59.9TOTAL CURRENT ASSETS 92.8 101.5
CURRENT LIABILITIES
ACCEPTANCES 2.6
CREDITORS 116.9
INVESTOR EDUCATION AND
PROTECTION FUND 0.1
OTHER LIABILITIES 62.9
INTEREST ACCRUED BUT NOT DUE ON
LOANS 2.3PROVISION FOR RETIREMENT BENEFITS 3.4
TOTAL CURRENT LIABILITIES 119.3 68.9
WORKING CAPITAL 212.1 170.4
INCREASE IN WORKING CAPITAL 41.6
TOTAL 212.1
Table 5: Schedule for Change in Working Capital
WORKING CAPITAL FINANCE:
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In India, generally short term funds are used to finance working capital. The two most significant
short-term sources of finance for working capital are: trade credit and bank borrowing. The use of
trade credit has been increasing over the past few years. Trade credit as a percentage of current
asset is about 40%. Bank borrowing is the next important source of working capital finance.
In case of JK TYRE both theses sources of finance for working capital are used extensively by thecompany. The company had short term loans of around 150.67 crores for the last fiscal year. Also
another 384.22 crores of amount was termed as other loans from bank which also was used for the
same purpose. The amount of trade creditors for the company for the same period was a whooping
468.90 crores down from 585.68 crores from 2007. This data clearly emphasizes the fact that
company makes use of these two sources of working capital finance very extensively. Now the
author intends to talk about the different sources used at JK TYRE in some details:
1. Accrued Expenses and Deferred Income: the accrued expenses represent that liability of the firm
that it has to pay for which the services have already been received. Hence they can be classified
as a spontaneous, interest free source of financing. Similarly deferred income represents fundsreceived by the firm for goods and services which it has agreed to supply in future. These receipts
increase the liquidity of the firm in the form of cash. In case of the JK TYRE as the dealers are
provided with the material strictly on the basis of advance payments made by them hence the
deferred income becomes an important source of finance for the company.
2. Overdraft: as explained in the section above this becomes a very important source of working
capital finance here at JK TYRE as the company has this facility being approved at various banks.
3. Cash Credit: at JK TYRE this form of working capital financing is a major source that is used
widely by the company. The company has been using of this facility of the banks at a very largescale of operations with the account balances fluctuating from being deficit for a majority period to
sometimes being in surplus, this facility is used by the company in fulfilling a number of its day to
day obligations. Also the major plus point for this facility is that with this kind of credit the
company can withdraw the amount as and when the need arises there is no need to withdraw the
complete amount at one. This is one of the most flexible arrangements with the banks that are
enjoyed by JK TYRE.
4. Purchase or Discounting of Bills: as explained earlier in the section on cash management this
again is another method that is resorted to at JK TYRE though the amount of it is very small in
comparison to the other sources utilized by the company, which are only around 30.1 crores.
5. Letter of Credit: this is another source of working capital finance that is used by the company
though this source is also not used extensively but still there are a number of banks with which this
facility has been opened up by the company. The various banks have sanctioned different value
LCs for the company. In this source of financing it is the bank that makes payment on behalf of
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the company to the clients of the company in case the company fails to keep up with its
obligations. The banks generally charge JK TYRE and the amount is predefined before the LC
arrangement is opened by the bank.
All the different sources of working capital finance explained above require some security. In case
of JK TYRE the company has used various modes of security such as hypothecation, pledge etc.The company has gone about using various sources as security for the amount of term loans from
the banks such as:
1. The movable and immovable property of its plants in Madhya Pradesh, Karnataka and
Rajasthan both present and future.
2. The company has also hypothecated its stocks and book debts for the amount of 384.22 crores
that has been raised from the banks and written down as other loans from banks in the balance
sheet.
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FINDINGS
Findings
MRF holds the biggest share of LCV tyres market & JK is on second position.
The company can control their working capital by way of optimization of working capital
cycle and maximizing credit to creditors and minimizing credit of customers by best
utilization of resources and minimizing stock level.
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The company can arrange for additional working capital by taking credit facility for a
temporary period i.e. adhoc facility, seasonal facility etc.
The company can control their working capital requirement by more realization of funds
and better negotiations with customers and suppliers and also maintaining optimum level
of stock
The company sources its working capital finance through two different ways i.e. the fixed
amount required for working capital from long term sources like long term loans, mortgage
loans and debentures etc and fluctuating working capital required from short term sources
like short term loans from banks etc
The company to deal in the competitive market and remain successful should focus highly
on and should have efficiency to operate the working capital limits keeping in view of
better resources availability, minimizing cost, maximizing production with optimum level
of stock.
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Recommendations and conclusion
Recommendations
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The following are the recommendations which can be suggested to the company:
1. The company makes use of SAP solution for the purpose of demand projections, while theauthor thinks that in order to have the projections even more accurate some method for
error calculations should also be included so as to make sure that the levels of finished
goods and raw materials for the company can be further improved which would add up to
the further improvement of operating efficiency of the firm and at the same time would
ensure that the working capital gap is shortened.
2. The method that the company follows for some of the raw materials is also not appropriate
as it adds up to the average inventory holding period for the company, this is generally
seen for some of the chemicals that are purchased in bulk at the time when the costs are the
lowest.
3. Another important source of improvement as per the author lies in the centralized
operations of the company, this method proves some kind of hindrance when we talk about
the operations taken part in the central part of INDIA while the major raw material comes
from the southern part of the country
4. the excessive dependence of the company on cash credit, is a major source of concern as
far as the author is concerned hence the author feels that the company can diversify its use
of other sources of finance as well which will again help to reduce the cost of this capital
for the company
Conclusion
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The performance of JK TYRES in recent years is good due to the up wising in the global market
followed by the domestic market. It is an upcoming one with good and innovative ideas andbelieved in improving all the areas of its operations. The company has a good liquidity position
and does not delay its commitment in case of both its creditors and debtors. The company being
mostly dependent on the working capital facilities, it is maintaining very good relationship with
their banks and their working capital management is well balanced.
Controlling of working capital requirement is done by the company by way of optimization of the
working capital cycle and maximizing credit to creditors and minimizing credit of customers by
best utilization of resources and minimizing stock level. Operating cycle time normally differ from
company to company which depends on nature of company and the operations to be performed by
the company.
The Company arrange for their additional working capital through by taking credit facility for a
temporary period i.e. adhoc facility, seasonal facility etc. Normally, the company sources its
working capital finance through two different ways i.e. the fixed amount required for working
capital from long term sources like long term loans, mortgage loans and debentures etc and
fluctuating working capital required from short term sources like short term loans from banks etc.
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Learning outcome
Learning outcome
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1) Understanding of how to analyze and compare the performance of any
companies with its competitor.
2) Knowledge about actual working environment in an organization.
3) Familiarity about various needs of working capital management in the firm.
4) Importance of the requirement of the optimal working capital in the firm.
5) Understanding how to make decisions regarding the various sources of
working capital funds.
6) Knowledge about corporate culture.
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BIBLIOGRAPHY
1. Annual reports of JK TYRES
2. Annual reports of MRF
3. KHAN AND JAIN, 2004. Financial Management. New Delhi: Tata
McGraw Hill.
4. PANDEY I.M., 2005. Financial Management. New Delhi: Vikas Publishing
House Pvt. Ltd.
5. http://www.capitaline.com
6. http://www.studyfinance.com
7. http://www.investopedia.com
8. http://www.jktyres.com
9. http://www.moneycontrol.com
10.http://www.bizresearchpapers.com/Kesseven.pdf
11.http://www.indianmba.com/Faculty_Column/FC285/fc285.html
12.http://www.indiastudychannel.com/projects/3085-WORKING-CAPITAL-MANAGEMENT.aspx
13.http://www.business-standard.com/pdf/jk_tyres__250110_01.pdf
14. http://www.exinfm.com/pdffiles/dba_wcm.pdf
15. http://im.sify.com/sifycmsimg/dec2009/Finance/14924491_JK_Tyre&Industries_Sep09Re
sults.pdf
16. http://www.qfinance.com/contentFiles/QF02/g1xtn5q6/12/2/best-practice-working-capital-
management-techniques-for-optimizing-inventories-receivables-and-payables.pdf
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APPENDIX:Calculation sheets
Sheet no.1
FUNDS FLOW STATEMENT:
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Sheet no.2
Schedules for changes in working capital:
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Sheet 3
Ratio calculations:
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