Essar

A SUMMER TRAINING REPORT
ON
VEHICLE FINANSIS AND MARKET RESEARCH
FOR
CARGO MOTAR PVT.LTD
GANDHIDHAM-KUTCHH
PREPARED BY
MR.RAJENDRA D.CHAVADA
FOR PARTIAL FULFILLMENT OF P.G.D.M.

PROGRAMME
PROJECT GUIDE
MR.J.K.ADVANI
COLLEGE
PARUL INSTITUTE OF MANAGEMENT

VADODARA
1
SHRI H.N.SHUKLA COLLGE OF MANAGEMENT STUDIES
DECLARATION
The undersigned MISS GARGI RABADIA a student of

M.B.A. hereby place the submission project on ESSAR
CONSTRUCTION INDIA LTD.
The unit that, we have visited was PVT.ltd. Company.

Its name is ECIL Situated at hazira in SURAT (GUJARAT)
I undersigned this project and this report was not

Previously submitted to any organization.
GARGI RABADIA.
2
PREFACE
As per the syllabus prescribed by Saurashtra university

M.B.A. programme. It is compulsory to take summer training and
Prepare a report.
I have visited an industry that played dominant role to develop

Practical viewpoint and made aware about the problems, opportunities.
And situation of Industrial unit in the FINANCE DEPARTMENT.
ON INDIA,
LTD. Proved to be a golden opportunity for me enrich my knowledge
By comparing practical Knowledge with theoretical knowledge.
3
ACKNOWLEDGEMENT
Wisdom is knowing what to do next…
Skill is knowing how to do it…
And Virtue is doing it…!
To work the corporate environment of Essar has taught me all

these three – Wisdom, Skill and Virtue. I would like to express my
sincere feeling to all those who have guided and taken kind interest to
me is useful to business and industry.
I express my deep sincere gratitude to all those persons who have

helped me through out the project and without their kind co-operation this
project would never have reached to it’s fruitfully conclusion.
First of all, I sincerely thank the management of Essar learning

centre for allowing me to carry out my project in their organization.
I would like to thank Mr. AJOY GHOSE (Vice President ECIL)

for giving me an opportunity to undertake the project at Essar Constructions
India Ltd.
I would like to offer a special thanks to Mr. Patra sir, Mr. B.M.
Kagzi and also I would like to thank the entire staff of the ECIL for their
assistance and co-operation.
I would like to special thanks to our principal and my project

guide Mr. Butalal Ajmera who has given me his precious time for making
my report perfectly.
GARGI RABADIA
4
SR SUBJECT PG NO.
NO.
1. ESSAR GROUP PROFILE

1.1 The Essar Group 9
1.2 History of Essar group 26
1.3 Mission & vision 30
1.4 Accreditation 33
2. INDUSTRY SENARIO 34
2.1 History of constructions 35
2.2 Introduction of industry 36
2.3 Construction industry and Indian economy 37
2.4 Technical human resources & 38
employment potential
2.5 Challenges to the construction industry 39
2.6 Concluding remarks for the construction 40
industry
3. ESSAR CONSTRUCTIONS LTD. 41

3.1 The company 42
3.2 Expertise 43
3.3 Resources 45
3.4 Associations 48
3.5 Road ahead 49
3.6 Ongoing projects 51
3.7 Glimpse of ECL’s esteemed clientele 52
5
4. WORKING CAPITAL
MANAGEMENT 53
6
4.1 INTRODUCTION 54
4.2 MEANING OF WORKING CAPITAL 55
5. SOURCES OF WORKING CAPITAL 57

5.1 Trade credit 57
5.2 Credit terms 57
5.3 Bank finance 58
5.4 Fund based 62
5.5 Non fund based 64
5.6 Opening of letter of credit 66
5.7 Some other sources of working capital 69
6. HISTORY & RECENT TRENDS IN

WORKING CAPITAL 70
7. WORKING CAPITAL STRATEGY

AT ESSAR 72
7.1 Levels of working capital 72
7.2 Profitability versus risk tradeoff for 75
alternative level of working capital
investment
7.3 Capital investment 76
7.4 Optimal level of working capital 76
investment
7.5 Proportions of short-term versus and long 76
term financing
7.6 Cost of short term versus long term debt 77
7.7 Risk of long-term versus short-term debt 77
7.8 Profitability versus risk tradeoff for 78
alternative financing strategy
7.9 Matching approach to asset financing 78
8. WORKING CAPITAL CYCLE AND

POLICY
8.1 Factors influencing working capital 81
7
8.2 Working capital policy 81
8.3 Operating cycle analysis 82
8.4 Current asset investment approaches 83
8.5 Industry norm approach 83
8.6 Economic model approach 84
8.7 Strategic choice approach 84
8.8 Need of working capital 84
9. WORKING CAPITAL ANALYSIS 85

9.1 NET WORKING CAPITAL 89
10. RATIO ANALYSIS 90
EXECUTIVE SUMMERY
8
ESSAR COMPANY is a private ltd. Company owned by Ruia family.
Having six big units like steel, constructions, shipping, communication, oil,
and power.
The project includes overview of company and the details of

financial department like working capital analysis.
Recently ESSAR has also put their steps in agrotech business also.
It always follows leadership value. In coming years it is going to be largest
oil refinery of India.
9
THE ESSAR GROUP PROFILE
ESSAR
POWER
LTD.
ESSAR
ESSAR OIL &
STEEL GAS
LTD. LTD.
ESSAR
GROUP
ESSAR ESSAR
CONSTRU TELECO
--CTION M
INDIA LIMITED
LTD. ESSAR
SHIPPIN
G LTD.
10
The ESSAR group is one of India’s largest corporate houses with
interests spanning the manufacturing and services in both old and new
economies: Steel, Power, Shipping, Construction, Oil &Gas and
Telecom.
The group’s enterprise value is approximately US$ 15 billion (Rs.

67,000 crore) and a turnover of over US$ 2.08 bn (Rs. 95 crore). Strategic
investments made by the group over the past decade have resulted in the
creation of tangible and intangible assets that are at the heart of the Indian
economy.
Essar is one of India’s largest corporate houses with leadership

position in the high-growth infrastructure sectors of Steel, Power,
Construction, Communication, and Shipping & Logistic. It employs 20,000
people in 50 locations worldwide. The Group’s revenue guidance for the
year ending March 2007 is over USD 4 billion. The entire group’s
investments have been consolidated under Essar Global Ltd., along with its
Ssix sectorial holding companies: Essar Steel Holdings Limited, Essar
Energy Holdings Limited, Essar Power Holdings Limited, Essar
communications holdings limited, Essar shipping & Logistic Holdings
limited, and Essar construction India Limited.
The group takes pride in being a high-performance multinational

organization, providing world-class services and products. Manned by a
highly efficient and dynamic team of employees, the group is growing
stronger every day. A committed corporate citizen, the group provides
unwavering support to the community as well as initiates various social and
ecological drives that have a positive impact on society.
11
ESSAR POWER
Essar power Limited set up India’s first new generation

independent power project at Hazira, India in the early 1990’s. The 515 MW
natural gas fired combined cycle has consistently set new standards of
excellence in the Indian power sector and meets the highest operating
benchmarks. This environment friendly plant operates with a plant
availability factor in excess of 94%. In addition to multi-fuel capability, the
plant has the lowest manpower to megawatt ratio and one of the lowest
capital costs per megawatt in India.
Project under execution
Essar Power Limited is currently executing a captive gas based

Combined Cycle Power Plant of 355 MW in two phases at Hazira, Gujarat
for mitigating the increasing power demand of its group company Essar
Steel Limited. The Phase-1 is operating in open cycle mode. The combined
cycle operation has also been commissioned. The phase-2 is scheduled for
March 2007.
Essar Power Limited has recently commissioned the 32 MW

coal based captive power project at Vishakapatnam, India for meeting the
power demand of its group company High-grade pellets Limited.
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ESSAR SHIPPING
The Company
Essar Shipping Ltd. (ESL) is e of the world’s leading integrated sea

logistics companies, with a special focus on transportation solutions for the
global energy business. A strong management team of experienced marine
professionals steers the company, maintaining customer focus, world-class
operations, an impression safety record and a consistent financial
performance. Their fleet accounts for almost 14% of India shipping fleet and
they own the country’s largest VLCC (very Large crude carrier), which is
also India’s first double hull, double bottom VLCC.
Rig to refinery – and beyond
As an end-to-end sea logistics provider, ESL serves customers across

the value chain – form ‘rig to refinery-and beyond’; offering services in the
areas of bulk transport, supply chain management and storage and
distribution. They are global experts in the energy business, with over 20
years of oil-handing experience. Their fleet handles a daily average of eight
million barrels of crude oil, 320,000 barrels of petroleum products and
355,000 tonnes of dry cargo.
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ESL operates in three main business areas: first, their energy
transportation group provides sea transportation management services to the
global energy industry, including US, European and Indian oil companies. A
key advantage is that they are one of the world’s largest independent
owner/operators of Suezmaxes tankers. In March 2004 we acquired first and
largest double hull double-bottom VLCC. They have long-standing
relationship with all the major global oil companies and chartered to
international oil majors like Shell, Exxon/Mobil, Chevron, Stat oil, Ultramar
Inc., BP Amoco and Texaco. Second, ESL’s integrated bulk/petroleum
product transportation services group offers supply chain mgt. services for
the sea transportation of bulk cargo and refined products. This group
services Steel, power, cement, fertilizer and petroleum companies in South
East Asia and India, for clients such as Indian Oil Corporation, Bharat
petroleum and Hindustan petroleum. ESL also handles 5 million metric
tonnes of coastal dry bulk cargo annually.
Third, to complete the integrated solution chain, their crude oil

and refined products handling and storage group provides storage group and
distribution services in India’s, through a wholly owned subsidiary vadinar
oil Terminal Ltd., owns port and terminal facilities to handle the receipt,
Storage and dispatch of crude oil and petroleum products at Vadinar in
Jamnagar, Gujarat, which is an all-weather, deep- draft port.
A complete sea logistics provider
ESL is a truly global company, deriving nearly three-quarters of

revenues from international business. Their fleet of vessels – made up of one
VLCC, six Suezmaxes, three product tankers, five dry cargo bulk carriers,
11 mini-bulk is modern, sophisticated, and fuel-efficient and one of the
India’s youngest, with an average are of 14 years against of 19 years. The
Vadanir terminal extends the value chain of ESL’s sea logistics services by
providing storage and handling facilities for 32 MTPA of crude oil and 14
MTPA of petroleum products.
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World-class Standards
Essar Shipping is one of the world’s lowest-cost operators with

an exemplary safety record. They handle their technical management
entirely in-house, maintaining their fleet to the highest quality, safety and
operational standards. T hey were the first Indian shipping company to
obtain the international safety management(ISM) code for their fleet of
bulkers and tankers in July 1995, three years ahead of the international
Maritime Organization’s (IMO) deadline. They were also the first Indian
shipping to voluntarily comply with ISO 9002:1994 standards and have now
upgraded to ISO 9001:2000 standards.
Their vessels received the US Coast Guard’s AMVER award

for high maritime safety standards. They were the first Indian company to
operate oil tankers in the highly competitive Atlantic region, especially to
the US, which has stringent environment laws and heavy liabilities for
failure. They are among the first shipping in the world to comply with the
International Ship and Port Security (ISPS) code.
Customer-led, flexible and Profitable
The needs of their customers drive their business and their core
competencies are closely aliened to their requirements. They carefully study
the geographical and product mix of their clients to provide the best
solutions, optimizing their businesses and saving them time and money.
Their customers know they can count on them for scheduling flexibility,
reliability, availability and management accessibility. They also support
clients with a comprehensive shipbroker network and a sophisticated e-
backbone, which allows them to track their cargo status on a real-time basis.
Their lean organization and management give them the

flexibility to respond quickly to customer needs and to market conditions.
Their astute mix of long-term and spot contracts gives us a vessel utilization
rate of around 95%. Since trending assets wisely are crucial in the shipping
business, ESL has invested consistently during recessions to be able to
profitable encase assets during revivals. ESL is publicly listed and has
remained financially strong even during periods of industry, with
consistently strong revenues and profit.
15
ESSAR OIL & GAS
The Company
Essar Oil Ltd. (EOL) is emerging as a leading integrated oil and gas
company spanning the entire value chain, from deep within the earth all the
way to the end-consumer. They have exploration and production (E&P)
rights in some of India are most valuable oil and gas blocks. EOL is building
a state-of-the-art refinery and a countrywide network of modern retail fuel
outlets.
Exploration and Production
They were one of the first private companies to bid for exploration
blocks in 1993. They won two onshore blocks in Rajasthan and one in the
Mumbai offshore region, where they have completed the first phase and are
moving into test grilling. They were than awarded a block each in the Cam
bay basin (Gujarat) and Cachar (Assam). They believe that they have
lowered the risks and increased the rewards of exploration by carefully
selecting the blocks with maximum potentia They also won the Ratna and
R-series for development and production, in partnership with ONGS and a
major international company. The Ratne series, located south of the prolific
Bombay High Field, holds an estimated 500 million barrels of oil reserves.
Independent international engineering firms have certified its high latent
value and EOL’s share is worth around US$ 230 million.
16
Their CBM (Coal Bed Methane) division pioneered a project in
Mehsana, Gujarat using innovative technology to establish the presence of
methane gas. Although the US the lone country to exploit CBM
commercially, EOL has already drilled three wells and is producing the gas
experimentally, the only Indian company to do so. EOL has also won a
CBM block in Raniganj, West Bengal.
Global-scale refinery
They were among the first to enter the refining sector when it
was opened to private participation. Their US$ 2.14 bn (Rs.99 billion)
refinery at Vadinar. This has achieved full financial closure, is two-third
complete and will be commissioned in 24 months. With a capacity of 10.5
MTPA (that can rise to 12MTPA after de-bottlenecking), this world-class
refinery complex focus on producing middle distillates like aviation turbine
fuel, kerosene oil and high speed diesel, which from over 60% of India’s
demand. They will also produce LGP and transport fuels including petrol
conforming to Euro 3rd and 4th product quality standards for the domestic and
export markets.
High automation, the latest technology and an ideal location on

India’s West Coast will give them significant competitive advantages. They
permission to import crude oil freely in VLCC’s, which offers considerable
cost savings especially since they are one of the closest refineries to the
Middle East, the main supply source for crude oil. With an eye on future
value building, they have also created the infrastructure to double their
refining capacity at a third of the cost and in half the time of a Greenfield
project.
17
Marketing
Essar oil Ltd. Is one of the few Pvt. Co.’s permitted to market
petroleum products in India. To serve retail customers ‘under brand ‘Essar
Oil’, EOL is building a modern, large countrywide distribution network of
Retail Outlets. EOL is designing them as outlets offering value-added
amenities and services that customers look for in individual market. Looking
beyond the saturated larger urban markets, they are reaching out to
consumers deep in India’s heartland. EOL is also the first private oil
company to import high speed diesel. They are marketing this at competitive
rates to bulk industrial consumers. In addition to petrol, diesel and
lubricants, they will market a full range of fuels including naphtha, kerosene
and fuel oil after the refinery is complete
Their pipelines division is putting in place the Central India
pipeline network. This 2,260 km long pipeline will connect our refinery to
demand centre across the northern, western and central parts of India. Thus,
with a presence in every rung of the value chain, EOl is all set to take over
the future.
18
ESSAR TELECOM & BPO
Essar Teleholding Ltd. (ETHL) is holding company for the telecom

interest of the US$ 3.6 billion Essar Group in India. It provides the group
focus for Essar’s telecom imitates in the areas of cellular service broad and
call centers. ETHL owns and operates the cellular properties of Haryana,
Rajasthan and Uttar Pradesh (East) through its subsidiary ADIL.
Essar Telecom
Essar teleholings Ltd. (ETHL) is the holding company for the

telecom interest of the US$ 3.6 billion Essar Group in India. It provides the
Group focus for Essar’s telecom imitates in the areas of cellular services
broad and call centers. ETHL owns and operates the cellular properties of
Haryana, Rajasthan and Uttar Pradesh (East) through its subsidiary ADIL
Essar along with Hong Kong bases Hutchison whompoa is one

of India’s largest cellular services providers covering all Indian metros and
six Indian states. The subscriber base has swelled to 1.4 million subscribers
and is growing rapidly. The states of Haryana, east U.P. and Rajasthan are
an independently by Essar the Hutchison group in the metros of Delhi,
Kolkata and Gujarat. In addition, Hutchison Essar South limited has begun
operations in 2002 as a fourth cellular operator in the South Indian states of
Andhra Pradesh, Karnataka and the metro of Chennai.
19
It is a major player in India’s communications sunrise. Essar
connects people all over India with world-class network coverage and
services at price. Little wonder then, that in some corners of India you will
see people using Essar’s mobile services were in land lines do not exist
Essar’s telecom business thus operates through the following
companies while essar teleholdoing limited is the holding company for
Essar’s Telecom interests:
Hutchison Essar Telecom Limited

Hutchison Essar South limited
Air Cell Digilink Limited
20
ESSAR CONSTRUCTIONS
From pipelines to ports, from industrial projects to intelligent

building, and on to canals, township, highways, bridges and breakwaters-
Essar Constructions Ltd has a rich and varied track record as a premier
construction company. In fact, over the last 30 years, they have poured
enough concrete to build that would circle the earth thrice.
As one of India leading engineering, procurement and

construction (EPC) contractors, they have executed projects worth over US$
3 bn (Rs 14000 crore) and are currently implementing projects worth US$
2.5 bn (Rs 11625 crore). They skillfully bring together hundreds of
engineers and tens of thousands of workers to complete our projects, always
maintaining an uncompromising focus on quality and safety. Setting high
benchmarks for themselves, they have consistently broken new ground and
achieved a long list of firsts. For example they built the world’s largest gas-
based sponge iron plant, were the first Indian company to setup an
independent power plant, and pioneered the laying offshore oil and gas
pipelines in India and built India’s first and longest island breakwater.
21
A history of expertise
They honed their skills as the turnkey contractor for most of

the Essar Group’s world-class projects and supporting infrastructure,
constructing most of the group’s current assets base of US$ 4.4 bn (Rs. 200
billion). That includes a 3.4 MTPA sponge iron plant, a 2.4 MTPA steel
mill and a 515 MW power plat at Hazira, a 4 MTPA Pelletisation plat in
Visakhapatnam, a cold rolling mill in Indonesia and a 10.5 MTPA oil
refinery under construction at Vadinar, Gujarat.
Indeed, the very origin of the Essar Group was in
specialized marine construction. As they acquired a truly wide and solid
base of experience in major areas of industrial and infrastructure
construction, they evolved from being the Group’s projects division into
Essar Projects Ltd. in 1990 and then into ECL.
Special Strengths
Simultaneously, they grew into a leading EPC contractor

for other customer, both domestic and international. Here too, both their
exposure and their expertise are wide ranging. Apart from their EPC
capability in oil and gas, power and steel, marine construction is one of their
special strengths. They have a unique capacity for underwater rock blasting
dredging. They also have significant skills in constructing irrigation canals,
siphons and bridges. ECL has a special expertise in pipelines for oil, gas and
water as the only Indian company with over 20 years of experience in cross-
country, onshore and offshore pipelines, from construction to
commissioning. They have laid 2,500 km of pipelines and built 150 km of
the prestigious Narmada canal. They are well equipped for infrastructure
construction particularly in the areas of ports, jetties and roads they have
built hundreds of kms of roads, including national and state highways and
expressways.
22
Equally noteworthy are their long-term relationships with over 20
strategic partners, including multinational construction and engineering
companies from around word. For example, currently a consortium of ECL,
Stroystransgaz of Russia is the EPS contractor for the 269 KM Bailadilla-
Vizag slurry pipeline. This is world’s second longest slurry pipeline. Along
with UEM of Malaysia, it is also building a 200-km, four-lane highway in
Karnataka worth US$ 156 m (Rs. 720 crore).
Delighting customers, always
Little wonder, then, that a long and impressive list of client

has turned to them, including most major Indian ports, the National
Highway Authority of India, the Gujarat Water Supply and Sewerage Board,
Gas authority of India, Hindustan Petroleum and ONGC. Their expertise is
also internationally recognized, whether for the pipelines they laid in Qatar,
the harbours they dredged in Sri Lanka or the cold rolling mill they built in
Indonesia. What’s more, they have won important contracts from govt.
agencies through local and international competitive bidding, meeting the
stringent requirement of the World Bank and the Asian Development Bank.
Their clients can rely on our skilled, experienced team, a

large, owned equipment bank of the latest construction equipment that is
also available for hire; and their talent for scouting the globe to procure the
best materials at competitive prices. They offer tailor-made solution to meet
every customer need, on lump-sum turnkey basis or on item rate contracts.
They have the flexibility to undertake infrastructure project either on an
EPC, build-own-transfer or build-own-operate transfer basis. Thus, they are
strategically placed to use their 30 years of project mgt. expertise to support
the infrastructure explosion in India and abroad. ECL will always live up to
the mission of achieving excellence through world-class practices and
standards in quality, safety and project management.
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OTHER BUSINESSES OF ESSAR
The Essar Group is a key player in the other blooming
sector of India’s growing economy, such as Information Technology,
Publishing and Agro-businesses.
Essar Information Technology Limited
EITL provides the full spectrum of services including

consulting, Enterprise solution, e-business solution, Application &
infrastructure and integration & mgt. of IT operation. Following the domain
strategy of combining business and technical expertise, the company offer
complete business solution in areas ranging from IT strategy formulations,
IT infrastructure planning and implementation, to SAP Our core
Competencies include:-
Business Consulting
SAP implementation & Support and infrastructure Mgt.
24
Paprika Media
Launched in 2004, Paprika Media is the groups foray into

publishing business is a separate entity with a dynamic and aggressive team.
It tied up with the UK based publishing company time out in March 2004, to
publish an Indian edition of the magazine. Time Out Mumbai was launched
in Sept. 2004 as a fortnightly priced at Rest. 25 and has become an integral
part of the entertainment of Mumbai. Paprika media plans to publish this
title in other cities as well and is looking at opportunities in the
entertainment and lifestyle space.
25
SESSAR AGROTECH LIMITED
EATL is an established name in agriculture produce catering

to international markets. An offshoot of the Essar Group of Companies, it
imbibes the experience of a group that has been running profitable and stable
businesses spanning diverse sectors, for over quarter of a century and has all
the vigor of a young company.
Essar Argotic Limited was amongst the pioneers in the Indian

Floriculture business. When it began its foray in to commercial production
of Dutch variety of roses as far back as 1994, it was just a beginner in the
international markets. But today, it is one of the leading players in exacting
markets in Europe, Far-East, middle-East and Australia. It has been
successful in establishing ‘Indus Fresh’ brand for Dutch roses and Exotic
Vegetables.
Through its quality conscious practices and strategic moves,

the company has not only succeeded in tough international markets but
managed to influence and enhance the overall perception of Indian
companies as well. From a humble beginning that began from the slopes of
Leoncavallo, the strong roots of Essar Argotic are spreading all across the
globe
26
HISTORY OF ESSAR GROUP
The name of the company ‘ESSAR’ is getting from the first
letter of the two brothers ‘SHASHI’ and ‘RAVI’ ‘S’ as ‘ESS’ and ‘R’ as
‘AR’ thus the combination of them make “ESSAR”
 The essar group builds enduring value through:
• Assets of $4.4bn (Rs. 20000cr.) in services & manufacturing.

• Rapid Growth in key sectors, build on firm foundations
• Setting & surpassing world-class benchmarks
• Using cutting-edge technology for strategic advantage
• Moving ever closer to customers and building strong brands
• Their valuable employees and their “positive attitude”
Ruia family has been in business and trading since the 1800s.
when the family first move to Mumbai from Rajasthan in Western India in
1956, Nand kishore Ruia, the group founder, moved south to Chennai to
begin independent business activities. In 1969, following the untimely
demise of Nand kishore Ruia, his sons Shashi and Ravi Ruia took over the
group. Along with a team of seasoned professionals, the Ruia have built the
perfect platform for Essar’s accelerating growth, with a strong foundations at
India’s industrial core and in the sunrise services sector, Essar has stayed
firmly in the forefront of new opportunities. An early start has made us a key
player in India’s exploding telecom market. Similarly, we set up India’s first
independent power plant and its first new generation private steel plant.
From the beginning, the group was built on businesses at the

heart of the Indian economy, often replacing foreign enterprises in India,
such as in oil & gas services, construction or shipping. The year 1987
marked its entry into the core manufacturing sector, as Essar Construction
began to build a hot briquette iron plant at Hazira. Over the next decade, it
invested billions to build a 2.4 mtpa steel mill and a 515 MW power plant at
Hazira, a 3.3 mtpa pelletisation plant in Vishakhapatnam, a 400,000 tpa cold
rolling mill in Indonesia and a 12 mtpa oil refinery which is under
construction at Vadinar, Jamnagar (Gujarat).
27
• WORLD – CLASS STANDARDS:
They insist on settings and surpassing world-class

benchmarks in everything they do. No wonder they have the world’s largest
gas-based sponge iron plant and are one of the world’s largest integrated sea
logistics companies that owns India’s largest double hull, double bottom
VLCC (Very Large Crude Carrier). All their business is highly integrated
across the value chain and use the latest technology to stay strong and agile.
They have invested several billion dollars on exclusive state-of-the-art
technology because we believe that it confers strong strategic advantages.
• TOUCHING MILLIONS OF LIVES:
For decades, they have quietly touched the lives of

millions of people with the steel to build cars, the oil to fuel, the power to
light up thousands of lives and the pipelines to bring drinking water to
remote villages. Today, they have come closer by connecting customers
with our cellular phone services and talking to thousands of people
through our call centers, a countrywide chain of fuel outlets and
marketing steel at the retail level.
SBOARD OF DIRECTORS:
28
Shri. Shashi Ruia Chairman
Shri. Ravi Ruia Vice chairman
Shri. Prashant Ruia Director
Shri. Rewant Ruia Director
Mr. S. V. Venkatesan Director
Mr. J. Mehra Director
Mr. V. G. Raghavan Director
Mr. Vikram Amin Director (Sales & Marketing)
Mr. Robin Banerjee Director (Finance)
Mr. K. V. Krishnamurthy Director
Mr. Sanjeev Shriya Director
Dr. G. Goswami ICICI Bank Ltd. Nominee
MANAGEMENT TEAM OF ESSAR GROUP:
Shri. Shashi Ruia Chairman

Shri. Ravi Ruia Vice chairman
Shri. Prashant Ruia Director
Shri. Anshuman Ruia Director
Ms. Smiti Ruia Director
Shri. Rewant Ruia Director
CORPORATE FUNCTIONS:
Mr. S. V. Venktesan Resident Director - Chennai

Mr. J. Mehra Resident Director – New Delhi
Mr. Jayesh Buch Resident Director- Ahmedabad
Mr. Madhu S. Vuppulury Resident Director – New York
Mr. Suresh Sundaram Director – Corporate Aviation
Mr. Adil Malia President – Human Resource
Mr. Sunil Bajaj President – Corporate Affairs
Mr. Mukesh Bhavnani President - Legal
Mr. Vijay Mehra Chief Information Officer
Mr. V Krishnan Head- Corporate communication
Mr. N.S. Paramshivam Head – Forex & Treasury
Mr. Dinyar M. Jivaasha Head – Corp. Risk & Ins. Mgt.
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MANAGEMENT TEAM OF ECIL
Mr. V. N. Chief Executive Officer

Paradkar
Mr. M. S. Director - Pipeline Division
Ambegaonkar
Mr. Prem Head - Civil & Marine Projects
Vardhan
Mr. J. K. Singh Director - Refinery Projects
Mr. V. Director - Essar Engineering
Nandakumar Centre
Mr. A. Sr. VP - Projects, Hazira
Subramaniam
Mr. R. N. Sarin Head - Heavy Engineering
Division
Mr. J. N. Desai Sr. VP - Global Sourcing
Division
Mr. B. Deb CFO & Company Secretary
Purkayastha
Mr. K.B.M Sr.VP - Human Resources
Swamy
Mr. Mohan Head - Planning & Systems
Phatak
30
MISSION & VISION OF ESSAR GROUP
• MISSION:
To create enduring value for customers and

stakeholders in core manufacturing and service businesses, through
world-class operating standards, state-of-the-art technology and the
‘POSITIVE ATTITUDE’ OF their people
• VISSION:
There are 7 E’s which define the VISSION of the

ESSAR GROUP.
1. EFFECTIVENESS:
 Doing the right thing at right time.
2. EFFICIENCY:
 Doing things in right way
 Conserving resources
 Being cost effective
 Being simple
 Observing system discipline.
3. ENTREPRENEURSHIP:
31
 Creating opportunities
 Innovating
 Taking initiative
4. EMPOERMENT:
 Nurturing self esteem
 Providing self respect
 Ensuring self worth
 Creating trust
5. EDUCATION:
 Sharing information & knowledge
 Learning
 Communicating
6. ETHICS:
 Having transparent business operation.
7. ENVIRONMENTAL HARMONY:
 Adding value to society
 Creating sustainable development
32
ESSAR PHILOSOPHY
The success of the ESSAR GROUP is dependent on
the development & realization of the potential of each of them. The mindset
of yesterday’s manager was to accept compromise & keep things neat
complacency, they should not be afraid to go against today’s currents
because they know that tomorrow is theirs. They must work on a vision of
what business can become.
ESSAR LEADERSHIP VALUE
Integrity at all times
• Satisfaction to internal & external customers.
• Facilitate all round excellence
• Continuously innovate & create
• Explore growth opportunities in new technologies.
• Constantly focus on cost reduction.
33
ACCREDITATION
The Gujarat Water Supply & Sewerage

Board (GWSSB)
The Gujarat Water Supply & Sewerage board (GWSSB) facilitated Essar for
its outstanding performance in infrastructure projects in the state of Gujarat
during the year 2001-2002 & for the timely completion of the Water
Pipeline project.
34
HISTORY OF CONSTRUCTION INDUSTRY IN
INDIA
35
INDIA IS A LAND of ancient civilization, with cities and
villages, cultivated fields, and great works of art dating back 4,000 years.
India's high population density and variety of social, economic, and cultural
configurations are the products of a long process of regional expansion. In
the last decade of the twentieth century, such expansion has led to the rapid
erosion of India's forest and wilderness areas in the face of ever-increasing
demands for resources and gigantic population pressures--India's population
is projected to exceed 1 billion by the twenty-first century.
INTRODUCTION OF CONSTRUCTION INDUSTRY

IN INDIA
36
The construction industry is the second largest industry of the
country after agriculture. It makes a significant contribution to the national
economy and provides employment to large number of people. The use of
various new technologies and deployment of project management strategies
has made it possible to undertake projects of mega scale. In its path of
advancement, the industry has to overcome a number of challenges.
However, the industry is still faced with some major challenges, including
housing, disaster resistant construction, water management and mass
transportation. Recent experiences of several new mega-projects are clear
indicators that the industry is poised for a bright future. It is the second
homecoming of the civil engineering profession to the forefront amongst all
professions in the country.
CONSTRUCTION INDUSTRY AND NATIONAL

ECONOMY
37
Presently, the annual expenditure budget of India is Rs.438,795
Crores against the backdrop of the total Gross National Product (GNP) of
the country of about Rs.2200,000 Crores or more (www.indiabudget.nic.in,
2004). Over the years, more than half of the expenditure budget is spent on
civil engineering works. Table 1 shows the investments made in the industry
over the past years. The construction industry sets in motion the process of
economical growth in the country; investment in this sector contributes
6.5% of Gross Domestic Product (GDP) growth (Das, 2003). Every Re.1
investment in the construction industry causes an Rs.0.80 increment in GDP
as against Rs.0.20 and Rs.0.14 in the fields of agriculture and manufacturing
industry, respectively. Statistics over the period have shown that compared
to other
Sectors, this sector of economic activity generally creates 4.7 times increase
in incomes and 7.76 times increase in employment generation potentiality.
Sustained efforts by the Indian construction industry and the Planning
Commission have led to assigning the industry status to construction today.
This means formal planning and above board financial planning will be the
obvious destination of the construction
Sector in the country, with over 3.1 Crore persons employed in it.
TECHNICAL HUMAN RESOURCE and

EMPLOYMENT POTENTIAL
38
In India, traditionally the construction industry has been labor
intensive as the labor is cheap and easily available. In 1995-96,
approximately 1.50 Crores people were employed in this industry which is
expected to be 3.26 Crores by the year 2004-2005 (Das, 2003). There are
three categories of manpower involved in this industry consisting of the
artisan level, the supervisory level and managerial level. It has been
observed that every Rs.1 Crore, investment on construction project,
generates employments of 22,000 unskilled man-days, 23,000 skilled or
semiskilled man-days and 9,000 managerial and technical man-days
approximately. With only 3% of total teaching in the country addressing the
direct needs of the construction engineering and management aspects
required in the construction industry, the 14th Engineering Congress on
Human Capital Development in January 2002 observed that “in time to
come, India will not have sufficient quality civil engineers even to undertake
basic infrastructure work.” Urgent steps are to be initiated to reverse this
trend of severe shortage of technical manpower.
CHALLENGES TO THE CONSTRUCTION

INDUSTRY
39
The construction industry everywhere faces problems and
challenges. However, in developing countries like India, these difficulties
and challenges are present alongside a general situation of socio-economic
stress, chronic resource shortages, institutional weaknesses and a general
inability to deal with the key issues. There is also evidence that the problems
have become greater in extent and severity in recent years. One of the
charges leveled at the construction industry, as at the beginning of the 21st
century, is that it has a poor record on innovation, when compared with
manufacturing industries such as aerospace or electronics.
1. Housing
2. Environment
3. Transportation
4. Power
5. Natural hazards
ECIL has its own Transportation and Power plant so

it has never face problem of these challenges.
CONCLUDING REMARKSFOR THE

CONSTRUCTION INDUSTRY
40
In the years ahead, the construction industry in India has to
overcome various challenges - be it with respect to housing, environment,
transportation, power or natural hazards. Technocrats associated with the
Indian construction industry need to employ innovative technologies and
skilled project handling strategies to overcome these challenges. The
outstanding performance under demanding situations in the past will stand in
good stead and give confidence to the Indian construction industry to bring
about an overall development in the infrastructure of the nation. The gains of
large investments in the mega-projects eventually will feedback to the
construction industry itself in the form of better economy and improved
work conditions.
41
S
THE COMPANY
The Essar Group was founded more than three decades ago
by the Ruia family and is headed by Chairman Shashi Ruia and Vice
42
Chairman Ravi Ruia. Essar Constructions Limited was one of the first
Companies to be started by the group and has close to forty years’
experience in diverse construction related activities The Company’s core
areas have been cross country pipe laying, marine construction, and
industrial and infrastructure projects of national importance. Undeniably
India’s partner in progress, Essar Constructions Limited plays a major role
in linking the countries with canals and cross country as well as undersea
pipeline for water, oil and gas.
Vision:
To be a global Engineering, Procurement and Constructions

contracting Company.
Mission:
To achieve excellence in the field of Engineering,

Procurement and Construction through world class practice and standards in
quality, Safety and Project Management.
The Company’s core competency lies in:
1. Project conceptualization and design

2. Projects Management
3. Project Execution
4. State of the art equipment for speedy execution of projects
5. A commitment to quality and world class standards
EXPERTISE:
43
1. Pipelines
Essar Constructions Limited has created for itself a niche
market in the pipeline business and is the only Company in India with more
than two decades of experience in Cross Country Onshore and Offshore
Pipeline from Constructions to Commissioning. This pipelines transport Oil,
Gas, Water and Iron Ore slurry.
2. Industrial Plants
44
As a turnkey contractor, major Industrial Projects have
been executed for Steel Plants, Refineries, Power Plants and infrastructure
Projects in India and overseas. As with every project that rolls out of ECL,
stringent quality controls norms are maintained and followed during design,
engineering, procurement and construction as to enable trouble free and
smooth operations.
3. Marine Constructions
Essar has over three decades of experience in Marine

Projects. It has undertaken diverse and challenging projects such as break
water construction, construction of Ports and Jetties, wharves, sea water
intakes, sheet pile jetties, trenches for underwater pipelines and pipe burials
and sea bunds. It has also undertaken underwater drilling and blasting and
dredging both in India and overseas. Every marine project has posed unique
challenges and Essar Constructions has overcome them by using its
expertise, ingenuity and pioneering path breaking solutions.
Resources:
1. Construction Equipments
45
Essar Constructions Limited has emerged as a leading EPC
Company and today it has its own large fleet of constructions equipments.
This helps in smooth execution of projects while keeping the execution cost
to minimum. Pipe Layers, Piling Rigs, Heavy Duty Cranes, Excavators,
Bending Machines, High Capacity Crawler Cranes, Dumpers, Tippers
including India’s largest mobile crane are some of the cream equipment
owned by the Company as on date. The best quality equipment with proven
design and track record are used in all turnkey projects.
Essar Constructions Limited has state of the art equipment spread over
several major projects sites in India, it is always maintained in top class
condition by a special equipment service division.
2. Manpower
46
The Company has multi skilled and multi
disciplined people power including well qualified engineer and project
managers with manifold years of deeply embedded hands on expertise and
experience. They have the ability to holistically visualize large and complex
projects, carry out techno-commercial evaluation, terrain assessment,
selection of the right people, select and source equipment and materials,
work out finer details and complete the entire project well within the
stipulated time and budget.
Company has bagged some of the prestigious EPC

Contracts worth mentioning herein below:
The Company has bagged three new pipeline projects worth

Rs. 368.39 Crore in Gujarat that demand extracting execution and matchless
expertise. Two of the projects involve laying gas pipelines for Gujarat State
Petronet Limited (GSPL). Essar Constructions Limited will lay cross
country pipeline for GSPL that will connect Rajkot and Morbi industrial
areas to the existing Baroda-Ahmedabad-Kalol pipeline. This contract for
24” buried trunk pipeline stretching 168 KMs and the second project
involving 30 KMs of 18” pipeline from Anklav to Dhuvaran in Gujarat are
valued at around Rs. 250 Crore. Both the projects involves the strenuous
task of laying pipeline across Railways, Minor rivers, Roads and Canal
Crossings etc.
47
Additionally, a project from Gujarat Water Resources
Development Corporation Limited has been bagged by ECL. This will
involve construction of a Pumping Station at Adundara and supplying and
lying of 23.5 cm wide and 1.4 cm thick MS pipeline from Adundara to
Sujlam Suflam Spreading Canal. GAIL (India) Limited has awarded EPC
Contract to the consortium formed between DQE International, Peoples
Republic of China and the Company for laying of pipeline and associated
facilities of Spread II between Jalalpur (SV7) to Bhoirpada (IP Station 3)
covering a
Distance of 147 KM and overall commissioning of the total pipeline system
for Dahej – Uran Pipeline Project of GAIL (India0 Limited for a total
consideration of Rs. 130 Crore. Essar Constructions Limited has also entered
into a sub-contract Agreement with JSC Stroytransgas, Russia for lying of
Pipeline and Associated Facilities (Part I & Part II) for Mundra – Delhi
Pipeline Project of Hindustan Petroleum Corporation Limited for a total
consideration of Rs. 117 Crore. Essar Constructions Limited has also
secured an EPC Contract for setting up of 140 MW Gas Fired Combined
Cycle Power Plant in Hazira, Gujarat for Bhander Power Limited for a total
contract value of Rs. 300 Crore.
Associations:
48
Essar Constructions Limited has long term relationship with
certain multinational construction and engineering companies from all
around the world. Currently, the Company is having a consortium
arrangement with JSC Stroytransgaz (STG) of Russia, DQE International of
China, Harbin Power Engineering Company Limited, China and SEPCO
Electric Power Construction
Corporation, China for doing the pipeline and Power Plant Projects. For
Mass Rapid Transport System (MRTS) Projects, the Company has been
short listed as one of the qualified bidders for the Hyderabad Mass Rapid
Transport System by bringing the consortium of Singaporean Companies
comprising of Sembcorp
Engineers & Construction PTE Limited, Singapore Technologies Electronics
Limited, SMRT Engineering PTE Limited who have proven track record for
developing the Mass Rapid Transportation System in far east countries.
49
ROAD AHEAD
Essar Constructions Limited is planning to concentrate
on following five key sectors: -
1. Infrastructure: - Ports, Airports, Mass Rapid Transport,

Light Rail Transport
2. Industrial: - Metallurgical, Petrochemical, Power
3. Cross country pipelines: - Oil, Gas, Water, Slurry
4. Real Estate: - High Rise Building, SEZs, Townships
5. Offshore: - Sub sea pipelines
Essar Constructions Limited has a strong order book

position and is working on a number of proposals
50
And is hopeful of bagging some new projects in the Gulf
Region. ECL has the expertise and a large pool of highly skilled engineers,
backed by some of the most modern and sophisticated equipments in the
Industry. Add to this, other national and international projects and our
associations with internationally renowned EPC organizations, our growth is
limited only to the opportunities.
51
ONGOING PROJECTS
Sr. Name of Project Name of Contract Completion

No. and Location Client amount Stipulated
1 Rehabilitation and National Rs 253.24 30 months from
upgrading of Sira to Highways Crores Jan. 2002
Chitradurga Section Authority of
km 122.3 to km 189 India
NH4 Road Work
upgrading of Highways Crores Jan. 2002
Chitradurga to Authority of
Harihar Section km India
207 to km 284 NH4
Road Work
upgrading of Harihar Highways Crores Jan. 2002
to Haveri Section - Authority of
km 284 to km 340 India
NH4 Road Work
4 Water pipelines for Tamil Nadu Rs 42.70 18 months from
Madurai-Theni Water Suppy Crores Sept... 2002
Districts CWSS to And
Madurai City. Drainage
Board,
Madurai
A glimpse of ECL’S esteemed clientele:
52
D
ir
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or
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a
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n
a
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P
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td
s,
.
M
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ai
Essar Oil Ltd. / Abb Lummus
Mormugao Port Trust
Crest
National Highway Authority
Essar Power Ltd.
Of India
Essar Steel Ltd. New Mangalore Port
Gas Authority Of India Ltd. Nhava-Sheva Port Trust
Oil And Natural Gas
Govt. Of Orissa
Commission
Govt. Of Srilanka P.T. Essar Dhananjaya
Gujarat Heavy Chemicals Ltd. Polyolefins Industries Ltd.
Gujarat Water Supply & Sewerage Qatar General Petroleum
53
Board Corporation
Hindustan Petroleum Corporation
Royal Dutch Shell
Ltd.
Sardar Sarovar Narmada
Gujarat Water Infrastructure Ltd.
Nigam Ltd.
Tamilnadu Cement
Kakinada Port Trust
Corporation
Kandla Port Trust Tuticorin Port Trust
Madras Port Trust Vishakhapatnam Port Trust
Indian Oil Corporation Gujarat State Petronet Ltd.
Tamilnadu Water Supply &
Administration
54
INTRODUCTION OF WORKING CAPITAL
MANAGEMENT
Working capital management is concerned with the

management of current assets. It is an important and integral part of financial
management as short-term survival is a prerequisites for long-term success.
One aspect of working capital management is the trade-off between
profitability and risk (liquidity). There is a conflict between profitability and
liquidity. If a firm does not have adequate working capital, that is, it does
not invest sufficient funds in current assets, it may become illiquid and
consequently may not have the ability to meet its current obligations and,
thus invite the risk of bankruptcy. If the current assets are too large,
profitability is adversely affected.
The key strategies and considerations in ensuring a

trade-off between profitability and liquidity is one major dimension of
working capital management. In addition, the individual current assets
should be efficiently managed so that neither inadequate nor unnecessary
funds are locked up.
55
MEANING OF WORKING CAPITAL
There are two possible interpretations of working capital

concept:
1. Balance Sheet Concept

2. Operating Cycle Concept
It goes without saying that the pattern of management

will be very largely influenced by the approach taken in defining it.
Therefore the two concepts are discussed separately in a nutshell.
Balance Sheet Concept:
There are two interpretations of working capital under the

balance sheet concept. It is represented by the excess of current liabilities
and is the amount normally available to finance current operations but,
sometimes working capital is also used as a synonym for gross or total
current assets. In that case, the excess of current assets over current
liabilities is called net working capital or net current assets. Economists like
Mead, Mallot, Baker and Field support the latter view of working capital.
56
They feel that current assets should be considered as working capital as the
whole of its help to earn profit and the management is more concerned with
the total current assets as they constitute the total funds available for
operational purposes. On the other hand, economists like Lincoln and Saliers
uphold the former view. They argue that (A) in the long run what matters is
the surplus of current assets over current liabilities (B) it is this concept
which helps creditors and investors to judge the financial soundness of the
enterprise (C) what can always be relied upon to meet the contingencies, is
the excess of current assets over the current liabilities since this amount is
not to be returned and (D) this definition helps to find out the correct
financial position of companies having the same amount of current assets.
The conventional definition of working capital on terms of the

differences between the current assets and current liabilities somewhat
confusing. Working capital is really what a part of long term finance is
locked in and used for supporting current activities. Consequently, the larger
the amount of working capital so derived,
Greater the proportion of long term capital resources siphoned off to short-
term activities. It is difficult to say whether this is right or wrong.
Apparently, when firm are warned about right working capital situation, the
logic of the above definition would perhaps indicate diversion of long-term
finances for short-term purposes. For, if short-term bank loan were procured
to bring in cash, under the conventional method, working capital would
evidently remain unchanged. Liquidation of debtors and inventory into cash
would also keep the level of working capital according to this definition may
produce a false sense of security at a time when cash resources in the
absence of adequate profits. Again, under the conventional method, cash
enters into the computation of working capital. But it may have been more
appropriate to exclude cash from such calculations because one compares
cash requirements with current assets less current liabilities. The
implications of this in conventional working capital computations is that
during the financial period current asset get converted into cash which after
paying off the current liabilities, can be used to meet other operational
expenses. The paradox, however, is that such current assets as are relied
57
upon to yield cash must themselves to be supported by long-term funds until
they are converted into cash.
At least three points seem to emerge from the above.

1. The balance sheet definition of working capital is perhaps not as
meaningful, except as an indication of the firm’s current solvency in
repaying its creditors.
2. When firms speak of shortage of working capital, they in fact possible
imply scarcity of cash resources.
3. In fund flow analysis an increase in working capital, as conventionally
defined represents employment or application of funds.
Sources of Working Capital
In India the most prevalent practices to finance working capital is short term
funds. The two most sources of finance for working capital are: (1) Trade
Credit (2) Bank Borrowing.
Trade Credit
Trade credit is mostly an informal arrangement and is granted on an open

account basis. A supplier sends good to buyer on credit, which the buyer
accepts and in effect agrees to pay the amount due as per sales term in the
invoice. Open account credit appears as sundry creditors on the buyer’s
balance sheet. Also takes forms of bills payable/notes payable. It refers to
the credit customer gets from supplier of goods in the normal course of
business. Buying firms do not have to pay the cash immediately for the
purchase rate and this deferral is, facilitate company to finance short term
working capital, called trade credit.
Credit Trade
58
Credit term refer to the condition under which the supplier sells on credit to
the buyer is required to pay the credit. It includes the due date and cash
discount.
Benefits and Costs of Trade Credit:

It is spontaneous sources of finance and its major advantages are:
• Easy availability
• Flexibility
• Informality
Cost of trade credit: buyer should calculate the cost of foregoing

cash discount to decide whether or not to avail cash discount. The following
formula can be used:
%Discount * 360
100% Discount (credit-discount period)
Buyer should also consider the implicit costs of trade credit, and particularly
of stretching account payable. These implicit costs may be built into the
piece of goods and services. Buyer can negotiable for lower prices for
payment in cash. Stretching account payable does generate additional short
term finance, but it can prove to be very costly sources. The firm will have
to sometimes forgone cash discount and required to penalty interest charges.
Thus the firm will not be adversely affected. A firm should compare the
opportunity cost of trade credit with other source of credit while making its
financing decision.
Accrued expenses and deferred income:
These are spontaneous source of short term financing of working capital.

Accrued expenses represent a liability that a firm has to pay for the services,
which it has already received. It is an interest free source of financing but
limited, as payment of accrued expenses can not be postponed for a long
59
period. Similarly advance income will be received only there is a demand
and supply gap or firms monopoly.
Bank Finance:
Bank finance is the most common negotiate sources of the working capital
finance. It can be availed in the form of over draft, purchase/discount of bill
and loan. Bank finance is regulated by loan.
Over draft
Under the facility, the borrower is allowed to withdraw funds in excess of

the balance in his current account up to certain specified limit during a
stipulated period. It is flexible arrangement from the borrower’s point if
view, since they can withdraw and repay funds whenever they desire.
Interest is charged on daily balance on the amount actually withdrawn
subject to some minimum charges.
Cash credit
Popular method of bank finance and similar to over draft facility. A

borrower is allowed fund from the bank up to the sanctioned limit. Cash
credit sanctioned against the security of current assets. There is no
commitment charges therefore interest is payable on the amount actually
utilized by the borrower.
Purchases and discount of Bills:
Under this borrower obtain a credit from a bank against its bills. Before
purchasing the bills, the bank satisfies itself as to the credit worthiness of a
drawer. Bank holds the bills as security for the credit. When a bill is
discounted, the borrower is paid the discounted amount of the bill bank
collects the full amount of maturity.
60
Working capital loan
A borrower any sometimes require ad-hoc or temporary accommodation in

excess of sanctioned credit limit to meet unforeseen contingencies. Banks
provide such accommodation through a demand loan account or a separate
“no-operable cash credit account. The borrower is required to pay a higher
rate of interest above normal rate of interest on such additional credit.
Hypothecation
Under this working capital finance provide against the security of movable
property, generally inventories. Banks generally grant credit hypothecation
only to first class customer.
Pledge
Under this borrower is required to transfer the physical possession of the

property offered security to the bank to obtain credit.
Mortgage
Transfer of legal or equitable interest in specific movable property of the

payment of a debt.
Lien
It means right to the lender to remain property belonging to the borrower

until they repays credit.
61
Source of working capital finance in Essar
Construction Ltd.
The company does not finance all of its working capital from a single; rather
it has a consortium of banks for financing its working capital needs. Main
among them being State Bank of India. The prime source of financing
working capital by company can broadly be classified in the following two
categories:
Fund based
In this case there is an actual out flow of funds from the bank to the
company. These can be further categorized as:
• Cash credit
• WCDL
• EPC
• Pre shipment
• Post-shipment credit
Non fund based
62
In this case there is no actual out flow of funds from the bank to the
company but the bank only make a commitment to pay if he company to pay
if the company defaults to pay. These can also be further categorized as:
• Letter of credit
• Bank guarantee
• Direct bill
FUNDS BASED
Cash credit (Overdraft)
Under this arrangement a pre-determined limit for borrowing is specified by

bank. The borrower can draw as often as required, provided the outstanding
does not exceed the cash credit limit and is covered by an adequate drawing
power limit. The facility of repaying the amount partially or fully is also
provided to the borrower. This form of advance is highly attractive from the
borrower point of view because while borrower has the freedom of drawing
the amount as a when required, interest is payable only on the amount
outstanding in the account. This account operates against security in the
form of pledge or hypothecation.
WDCL (Fixed Tenor Loan)
These are advances of amount, which are credited to the current account of
borrower or related to them in cash. Interest is charge on the entire loan
amount, irrespective of how much is drawn. Loans are payable either on
demand or in periodical installment.
Pre-shipment credit
63
It is short term working capital finance specially provided to an exporter
against the documentary evidence of having entered in to export
communities. The packing credit is given at a pre-shipment stage and is
given for the procurement of raw material, for meeting manufacturing and
packing charges and the payment insurance premium and freight. The pre-
shipment is to be liquidated against the proceeds of export documents
tendered.
This facility is made avaible by banks at relatively lower rate to promote

exports and is strictly governed by RBI guidelines. The banks provided this
form of finance at cheaper rate because they get refinance from the RBI at
concessional rate. The difference between lending rate and refinance rate is
profit margin of the banks.
Pre-shipment credit can be utilized either in rupee or in foreign currency.

The RBI in its credit policy decided the interest rate for rupee credit. The
rate uniform for all borrower and is not influenced by credit rating of the
company. The interest rate for foreign currency credit are London inter bank
offer rate (LIBOR) linked. Banks according of the borrower credit rating and
bank’s cost of funds decide the spread over LIBOR.
Post-shipment credit
Post-shipment finance is a post sale facility extended by the banks after the
goods have been shipped and against the submission of expert document
evidencing the dispatch of goods. This facility is given only in rupee.
NOTE:
Under these guidelines, for borrower enjoying working capital limit of

rupees 10crore or above, the limit is require to be delivered through WCDL
of 80% and cash credit of 20%. In order to meet the flexibility required for
expert operation, the assessed limit packing credit is reduced from MPBF
64
and 80% of the balance is delivered through WCDL and remaining 20%
through cash credit and its various components.
NON FUND BASED

Letter of credit
A letter of credit is an arrangement under which a bank undertakes to pay

against the document stipulated in the letter of credit provided term and
condition of the same have been compiled with thus the liability purchaser’s
supplement of L/C. The L/C opened by Essar Construction Ltd. Are
irrevocable once and generally for a period of 90 or 180 days duration.
Parties are involved in L/C
• Applicant (the purchaser)

• Beneficiary (supplier)
• L/C opening bank
• Advising bank
• Negotiating bank
65
66
Opening of the letter of credit
When importer and exporter agree on the commercial terms like delivery
term, delivery schedule, payment terms etc. they enter into a contract. There
after, the importer approaches their bank to upon a letter of credit in favor of
the exporter. While making an application for letter of credit, the instruction
to be given the applicant for credit. I.e. importer to the issuing bank must be
clear and unambiguous.
L/C can be opened for material as well as services. The supplier draws a bill
of exchange for the amount equivalent to invoice amount against this L/C
and can get it discounted for immediate funds as soon as they get it back
duly accepted by purchaser.
However in case of ESSAR the company have an arrangement for

establishment of L/C as well as discounting the same on behalf of them and
get their account credited. All the bank charges are to be bear by company.
By following L/C Route Company enjoys the benefit of lower rate of
effective interest as compare to cash credit. For added security the exporter
can get the L/C confirmed by bank in his own country and in such situation
the confirming bank has the liability in addition to the opening bank. Such
types of L/C are known as confirmed L/C.
Payment again L/C requires submission of following document:
• Bill of exchange
• Commercial invoice
• Packing list
• Transport document: bill of lading
• Certificate of origin
• Insurance policy
67
Bank guarantee
The company takes bank guarantee because they do not want to local up
their own funds as ideal security. Bank guarantees are of two types:
• Financial bank guarantee

• Performance bank guarantee
The bank for deferred in cash of imports issue financial guarantee and
performance guarantees are given on behalf of the company undertaking the
fulfillment of the contract. In some cases the bank take counter guarantees.
For availing this facility the company has to pay bank charges or
commission.
Direct bills (Hundi)
It is an undertaking by the company to the bank, that it will make a payment

to the bank on the due date, of the amount that is mentioned in that bill.
Against this documents the bank hands over to the company the original
documents received by it from the supplier. On the basis of these company
can release the goods from the port or from the transporter. This facility
enables the purchaser to get the goods without blocking any capital limit.
In case of the direct bill bank has no direct liability to the supplier for
making payment. It is liable to pay if and only if the company may
sometime issue and an irrevocable instruction to bank.
Instructing it to debit the companies current account and make payment to

the supplier on the due date. Such type irrevocable instruction is required to
be confirmed by the bank.
68
Some other source of working capital
• Net gain from operation
This is the most desirable source of working capital it does not burden the
business with external obligation. It is surplus amount left with the company
after payment of dividend if any.
• Sale of fixed assets
This occasional and irregular source and the concern usually depend on this.
• Issue of shares
The share issue may not add to the interest burden like the borrowing from
the bank but they result demand for dividend and the sharing the ownership
in the business with new investors.
• Commercial papers
Commercial paper is an instrument for raising short-term finance from

money market. It is a substitute for existing working capital finance from
bank. It is floated for the advantage of the obtaining short-term finance at a
cheaper rate from market. It is enables corporate borrower to replace to bank
finance their by obtaining advantage in term of the cost of funds. Credit
rating from any of the registered rating agencies is a must before CPs are
issued. The minimum ratubg a corporate should obtain is P2 of CRISIL or
equivalent. However, it is presently not possible to place Cap’s in the market
with a credit rating below P1, as there are no investors. Presently, P1 +
rating company can place Cap’s at all in cost of about 11 to 12% p.a. vis-à-
vis the cash credit rate of about 14 to 15% p.a the funding costs depends
upon prevalent money market conditions which fluctuates.
69
• Public deposits
Many firms large and small solicit unsecured deposits from the public in
recent years mainly to finance their working capital requirement.
• Inter-corporate deposits
It is deposit made by one company with another. Normally for period up to

six months. Such deposit can be called (3 days), 3 months deposit or 6
months deposit.
70
History and Recent Trends in Working Capital
Historically, the Indian commercial bank used to extend credit

predominantly to trade. However, over the years, in keeping with the last
industrialization of the economy, they have enlarged their operation to
include a wide spectrum of services, including term lending and working
capital finance. Working capital financing initially was the exclusive domain
of the Indian commercial banks and was subject to strict control and
regulation by the RBI. The RBI, commonly known as the MPBF method,
laid down method of assessment of permissible finance by the bank.
Industry wise specific norms for inventory and receivables were laid down
by RBI which had to be followed by all banks. Prior approval of RBI was
required before disbursal of funds the banks were required to execute post
sanction supervision on the funds lent and their uses asking the corporate to
submit various financial statements like the balance sheet and QIS I,II and
III.
Credit Delivery System was decided by RBI. In case of funds lent above, a
prescribed limit, financing to be compulsory done through “Consortium
Arrangement” wherein a number of banks participate and the bank with the
highest share is chosen as leader. Current assets and current liabilities were
to be strictly classified according to the modalities prescribed by the RBI.
Stringent control on end use of working capital finance. Interest rates are
now determined by the RBI’s Credit Policy and Money market conditions,
as reflected in the Primary Lending Rate of respective commercial bank. As
compared to previous regulated rate of interest the borrower are now
exposed to such fluctuations.
71
Recent Trends in Working Capital Financing:
Liberalization and opening up of Indian financial sector brought in a number
of changes. The major ones being:
• A no. of private banks like Indusind, Centurion, Global trust bank, etc,
have entered the Indian banking sector and are offering a range of
banking services including working capital financing. Apart from
private and foreign banks even Development Financing institutions
are extending working capital finance to repute corporate.
• Relaxation of several RBI controls and changes in regulations, such
as:
The MPBF method of working capital financing is longer compulsory.

Banks have been given freedom to introduce their own method of
assessment. Industry wise pre-determined norms have been removed
allowing banks to set them as per their discretion. Earlier banks had to
get prior approval of RBI before sanction & disbursal. The prior approval
of RBI is no longer required there by reducing the time taken for
disbursement of the approved limits.
• Consortium practical approach of cash flow has been introduced

as an alternative to the historical volume basis of MPBF for
assessment of the working capital.
• Introduction of commercial paper as a cheaper instrument for
financing working capital thereby reducing the dependence on
the bank finance. Borrowers are now allowed by RBI to borrow
working capital funds in foreign currency from banks, out of
their FCNR (B) deposits in lieu of rupee borrowing. This given
tremendous leverage to exporters with natural hedge, to reduce
their financing costs.
• Relaxation of ECB (External Commercial Borrowing) guidelines
by permitting corporate to borrow, without end-use restriction.
Thus ECB funds can now be used for meeting the working
capital needs.
72
Levels of Working Capital Management
In a “perfect” world, there would be no necessity for working capital assets
and liabilities. In such a world, there would be no uncertainty, no transaction
costs, information search costs, scheduling costs, or production and
technology constraints. The unit cost of producing goods would not vary
with the amount produced. Firms would borrow and lend at the same interest
rate. Capital, labor, and product markets would reflect all available
information and would be perfectly competitive. In such a world, it can be
shown that there would be no advantage for firms to invest or finance in the
short term.
But the world in which real firms function is not perfect. It is characterized
by the firm’s considerable uncertainty regarding the demand, market price,
quality, and availability of its own products and those of suppliers. There are
transaction costs for purchasing or selling goods as securities. Information is
costly to obtain, and the firms is faced with limits on the production capacity
and technology that it can employee. There are fixed as well as variable cost
associated with producing goods for sale, and there are spreads between the
borrowing and leading rates for investments and financing of equal risk.
Information is not equally distributed and may not be fully reflected in the
prices in product and labor markets, and these markets may not be perfectly
competitive.
These real world circumstances introduce problems with which the firm
must deal. While the firm has many strategies available to address these
circumstances, strategies that utilizes investment or financing with working
capital accounts often offer substantial advantage over other techniques. For
example, assume that the firm is faced with uncertainty regarding the level
of its future cash flows and will incur substantial cost if it has insufficient
cash to meet expenses. Several strategies may be formulated to address this
uncertainty and the costs that it may engaged.
73
Among these strategies are some that involve working capital investment or
financing such as holding additional cash balances beyond expected needs,
holding a reserve of short term marketable securities, or arranging for the
availability of additional short term borrowing capacity
One of these strategies (or a combination of them; may well be the least
costly approach to the problem. Similarly, the existence of fixed set up costs
in the production of goods may be addressed in several ways, but one
possible alternative is to hold inventory.
By these examples, we see that strategies using working capital accounts are
some of the possible ways firms can respond to many of the problems
engendered by the imperfect and constrained world in which they deal. One
of the major features of this world is uncertainty (risk), and it is this feature
that gives rise to many of the strategies involving working capital accounts.
Moreover, a firm’s net working capital position not only is important from
an internal standpoint; it also is widely used one measure of the firm’s risk.
Risk, as used in this context, deals with the probability that a firm will
encounter financial difficulties, such as the inability to pay bills on time. All
other things being equal, the more net working capital a firm has, the more
likely that it will be able to meet current financial obligations. Because net
working capital is one measure risk, a company’s net working capital
position affects its ability to obtain debt financing. Many loan agreements
commercial banks and other lending institutions contain a provision
requiring the firm on maintain a minimum net working capital position.
Likewise, bond indentures also often contain such provision.
The overall policy considers both the level of working capital investment
and it’s financing. In practice, the firm has to determine the joint impact of
these two decisions upon its profitability and risk. However, to permit a
better understanding of working capital policy, the working capital
investment decision is discussed in this section, and the working capital
financing decision is discussed in the following section.
74
The size and nature of a firm’s investment in current assets is a function of a
number of different factors, including the following:
• The type of products manufactured

• The length of the operating cucle
• The sales level (because higher sales require more investment in
inventories and receivables)
• Inventory policies
• Credit policies
• How efficiency the firm manages current assets. (Obviously, the more
effectively management economies on the amount of cash, marketable
securities, inventories, and receivables employed, the smaller the
working capital requirements).
For the purposes of discussion and analysis, these factors are held constant
for the remainder of this topic. Instead of focusing on these factors, this
section examines the risk-return tradeoff associated with alternative levels of
working capital investments.
75
Profitability versus Risk Tradeoff for Alternatives
Levels of Working Capital Investment
Before deciding on an appropriate level of working capital investment, a

firm’s management has to evaluate the tradeoff between expected
profitability and the risk that it may be unable to meet its finance
obligations. Profitability is measured by the rate of (operating) return on
total assets; that is EBIT/ total assets. The risk that the firm will encounter
financial difficulties is related to the firm’s net working capital position.
Figure illustrates three alternative working capital policies. Each curve in the
figure demonstrates the relationship between the firm’s investment in current
assets and sales for that particular policy.
Policy C represents a conservatives approach to working capital

management. Under this policy the company holds a relatively large
proportion of its total assets in the form of current assets. Because the rate of
return on current assets normally is assumed to is less than the rate of return
on fixed assets, this policy results in a lower expected profitability as
measured by the rate of return on the company’s total assets. Assuming that
current liabilities remain constant, this type of policy also increase the
company’s net working capital position, resulting in a lower risk that the
firm will encounter financial difficulties.
In contrast to policy C, policy A represents an aggressive approach. Under

this policy the company holds a relatively small proportion of its assets in
the form of lower yielding current assets and thus has relatively less net
working capital. A result, this policy yields a higher expected profitability
and higher risk that the company will encounter financial difficulties.
Finally, policy B represents moderate approach, because expected

profitability and risk levels fall between those of policy C and policy A.
76
Using net working capital as a measure of risk, the aggressive policy is most
risky, and the conservative policy is the least risky.The current ratio is
another measure of a firm’s ability to meet financial obligations as they
come due. The aggressive policy would yield the lowest current ratio, and
the conservative policy would yield the highest current ratio.
Optimal level of Working Capital Investment
The optimal level of working capital investment is the level expected to

maximize shareholder wealth. It is function of several factors, including the
variability of sales and cash flows and the degree of operating and financial
leverage employed by the firm. Therefore no single working capital
investment policy is necessarily optimal for all firms.
Proportions of Short-term and Long-term Financing
Not only does a firm have to be concerned about the level of current assets;
it also has to determine the proportions of the short and long term debt to use
it financing these assets. This also involves tradeoff between profitability
and risk.
Sources of debt financing are classified according to their maturities.

Specially, they can be categorized as being either short-term or long-term,
with short-term sources having maturities of 1year or less and long-term
sources having maturities of greater than 1 year.
77
Cost of Short-term versus Long-term debt
Historically long-term interest rates normally exceed short-term rates

because of the reduced flexibility of long-term borrowing relative to short-
term borrowing. Infact, the effective cost of long-term debt, even when
short-term interest rates are equal to or greater than long-term rats. With
long-term debt, in contras, the firm incurs the interest expense even during
times then it has no immediate need for the funds, such as during seasonal or
cyclical downturns. With short-term debt, in contrast, the firm can avoid the
interest cost on unneeded funds by paying off the debt. Therefore, the cost of
long term debt generally is higher than the cost of short-term debt.
Risk of Long-term versus Short-term debt
Borrowing companies have different attitudes toward the relative risk of

long-term versus short-term debt than lenders. Whereas lenders normally
feel that risk increase with maturity, borrowers feel that there is more risk
associated with short-term debt. The reasons for this are two fold.
First, there is always the chance that a firm will not be able to refund its
short-term debt. When a firm’s matures, it either pays off the debt as part of
debt reduction programmed or arranges new financing. At time of maturity,
however, the firm could be faced with financial problems resulting from
such events as strikes. Natural disasters, or recessions that cause sales and
cash inflows to decline. Under these circumstances the firm may find it very
difficult or even impossible to obtain the needed funds. This could lead to
operating and financial difficulties. The more frequently a firm must
refinance debt, the greater is the risk of its not being able to obtain the
necessary financing.
Second, short-term interest rates tend to fluctuate more over time than long-
term interest rates. As a result, a firm’s interest expenses and expected
earnings after interest and taxes are subject to more variation over time with
short-term debt than with long-term debt.
78
Profitability versus Risk Tradeoff for Alternative Financing
Strategy
Company’s need for financing is equal to the sum of its fixed and current
assets. Currents assets can be divided into following two categories:
• Permanent current assets

• Fluctuating current assets
Fluctuating current assets are those affected are those affected by the
seasonal or cyclical nature of company sales. For example, a firm must make
larger investments in inventories and receivable during peak selling periods
than during other periods of the year.
Permanent current assets are those held to meet the company’s minimum
long-term needs (for example, “safety stocks” of cash and inventories).
Matching Approach to Asset Financing
The fixed assets and permanent current assets lines are upward slopping
indicate that the investment in these assets and by extension, financing needs
tend to increase over time for a firm whose sales are increasing.
One way in which a firm can meet its financing needs by using approach in
which the maturity structure of the firm’s liabilities is made to correspond
exactly to the life of its assets. This is illustrated in figure – 3. As can be
seen, fixed and permanent current assets are financed with long-term debt
and equity funds, whereas fluctuating current assets are financed with short-
term debt. Application of this approach is not as simple as it appears.
However, in practice the uncertainty associated with the lives of individual
assets makes the matching approach difficult to implement.
79
Working Capital Cycle and Policy
Cash flows in a cycle into, around and out of a business. It is the business’s
life blood and every manager’s primary task is to help keep it flowing and to
use the cash flow to generate profits. If a business is operating profitably,
then it should, in theory, run out of cash and expire. The faster a business
expands the more cash it will need for working capital and investment. The
cheapest and best sources of cash exist as working capital right within
business. Good management of working capital will generate cash will help
improve profit and reduce risks. Bear in mind that the cost of providing
credit to customers and holding stocks can represent a substantial proportion
of a firm’s total profits.
There are two elements in the business cycle that absorb cash – inventory
(stock and work-in-progress) and receivables (debtors owing you money).
The main sources of cash are payables (your creditors) and Equity and loans.
Each component of working capital (namely inventory, receivables and

payables) has two dimensions…..TIME…..and MONEY. When it comes to
managing working capital – TIME IS MONEY. If you can get money to
move faster around the cycle or reduce the amount of money tied up, the
business will generate more cash or it will need to borrow less money to
fund working capital. As a consequence, you could reduce the cost of bank
interest or you will have additional free money available to support
additional sales growth or investment. Similarly, if you can negotiate
improved terms with supplier e.g. get longer credit or an increased credit
limit; you effectively create free finance to help fund future sales.
If you……
80
Collect receivables (debtors) faster
Collect receivables (debtors) slower
Get better credit from supplier
Shift inventory (stocks) faster
Move inventory (stocks) slower
Then……
You release cash from the cycle
Your receivables soak up cash
You increase your cash resources
You free up cash
You consume more cash
It can be tempting to pay cash, if available, for fixed assets e.g. computers,
plant, vehicles etc. if you do pay cash, remember that this is now longer
available for working capital. Therefore, if cash is tight, consider other ways
of financing capital investment – loans, equity, leasing etc. similarly, if you
pay downs a plug hole; they remove liquidity from the business.
Factors influencing Working Capital:

81
Working capital needs of a firm are influenced by numerous factors. The
important ones are:
• Nature of business
• Seasonality of operations
• Production policy
• Market condition
• Condition of supply
Strategy of constant production in Essar Construction Ltd. Not affected by

seasonal fluctuations.
Working Capital Policy
Two important issues in formulating the working capital policy are:
• What should be the ratio of current assets to sales?

• What should be the ration of long-term financing to short-term
financing?
Profit Criterion for Current Assets:
82
Current assets can be easily and the value realized to liquidation would be
more or less equal to the amount invested initially, and the profit per year
can be calculated as:
P = I* (r-k)
I = Initial investment
P = Profit
R = Rate of return
K = Cost of Capital
Operating Cycle Analysis:
• Raw material and store storage period

• Work in process stage
• Finishing goods inventory stage
• Debtors collection stage
Operating cycle is helpful forecasting and control of working capital
Current Asset Investment Approaches:
83
A basis question that arises in case of working capital management is how a
management finances appropriate level of investment in current assets?
There are basically three broad approaches, which a management may take.
There are
• Industry norm approach

• Economic model approach
• Strategies choice approach
Industry Norm Approach
In this approach the industry practice or norm is used to arrive at the target
levels of investment of current assets. Of course, there would be year to year
or inter firm fluctuation and differences. Over a period of time, the industry
adjusting to its environment and risks is expected to have settled down to
and average 30, 60 and 90 days to raw material as inventory.
• The norm could be less of a reality and more a myth, like Marshall’s
representative firm, or the statistician’s mean.
• Everyone might more or less do what other is doing, resulting in
imitating behavior.
• The possibility of drift determined by environment changes and
inadequate internal adjustments
• Absence of an impetus to search for better solutions than those
embedded in the norms through economic or strategies approach.
In spite of these problems, the industry norm approach has arrived by forces
of history and tradition. A careful use of this approach can under certain
conditions provide useful benchmark especially for new entrants.
Economic Model Approach:
84
The economic model approach signifies an explicit rational model of profit
maximization or cost minimization. The approach arrives at an optimal
solution for a case making trade – off between risk and profitability, using
economic decision criterion. Economic order quantity model is typical e.g.
of this approach.
The economic model approach avoids the myth of the means, implicit in the
industry norm approach. It is nearer to reality in basing itself on the
assumptions that every company at particulars point in time represents more
of less a unique case. Even so the approach has been tried in limited way, in
part because of its restrictive assumptions and exclusive reliance on financial
or economic variables and total conditions. This approach however
incorporates that profit motive is inherent in business decision. Even if such
model can provide indicative solution it can prove helpful in day-to-day
management of funds.
Strategies Choice Approach:
It is possible to take the position that there are no ideal solutions to the
working capital problem of company. As condition and goals change,
solution must be worked out every time to fit each unique situation. Without
letting conventional restrictions limit our choice. There is thus concept of
strategies choice involved in the area of current asset management.
Need of the Working Capital:

Company’s working capital is used to pay short-term obligations such as
accounts payable and buying inventory. If company’s working capital dip
too low, its risk running cut of cash. Even very profitable business can run
into trouble if they lose the ability to meet their short-term obligations. The
calculator assists you in determining working capital needs for the next year.
WORKING CAPITAL ANALYSIS
85
NET WORKING CAPITAL APPROACH:
According to this approach, deducting the current liabilities

from the current asset can arrive at working capital. The following table
represents the current asset, current liabilities and their % composition and
net working capital.
• COMPONENTS OF CURRENTS ASSETS:

(Rs. In “000”)
Particulars 2003-04 2004-05 2005-06 2006-07
Inventories 1,341,438 1,802,212 2,820,662 3,999,139
Sundry 460,472 673,283 829,422 971,656
debtors
Cash & 457,982 359,309 717,402 1,159,855
Bank
Balance
Loans & 932,061 945,055 3,770,406 4,470,984
Advances
Current 3,191,953 3,779,859 8,137,892 10,601,634
Assets
• %COMPOSITION OF CURRENT ASSET:
Particulars 2003-04 2004-05 2005-06 2006-07 AVG.

Inventories 43.03 47.68 34.66 37.72 40.77
Sundry 14.43 17.81 10.19 9.17 12.90
debtors
Cash & 14.35 9.51 8.82 10.94 10.91
Bank
Balance
Loans & 29.20 25.00 46.33 42.17 35.66
Advances
86
% composition of current assets
120%
100%
80% Series4
Series3
60%
%
Series2
40% Series1
20%
0%
2003-04 2004-05 2005-06 2006-07
Year
Analysis:
From the above table and chart we find that inventory and
loans & advances plays major role in current assets. We can also say that
according to demand of finished good the inventory level of the company
varies. Previously company’s most purchase done through credit purchase
and hence cash & bank balance have minor role in current assets of the
company. But now it has not specific credit policy.
Company suffers losses in the year 2005-06, due to which

loan and advances was an increased and sundry debtor decreased. On an
average other components of the current assets, loan &advances 35.66%,
inventory 40.77%, sundry debtor 12.90%, cash &bank balance 10.91%.
87
• COMPONENT OF CURRENT LIABILITY :
(Rs. In “000”)
particulars 2003-04 2004-05 2005-06 2006-07
Acceptances 404,919 1,107,366 1,035,539
Sundry 814,722 1,837,271 2,267,068 3,946,848
creditors
Advances 639,042 621,042 3,091,819 3,034,763
from
customers
Other 40,692 52,767 81,437 267,525
liabilities
Interest 390 - 2,332 14,194
accrued but
not due on
loans
Current 2,287,900 2,916,071 6,550,022 8,298,869
Liabilities
% COMPOSITION OF CURRENT LIABILITIES
Particulars 2004 2005 2006 2007

Acceptances - 13.89 16.90 12.48
Sundry 35.61 63 34.61 47.56
creditors
Advances 27.93 21.30 47.20 36.57
from
customers
Other 1.77 1.80 1.24 3.22
liabilities
Interest 0.02 - 0.04 0.17
accrued but
not due on
loans
88
% composition of current liabilities
100 C Acceptances
D Sundry creditors
90 E Advances from customers
F Other liabilites
80 B Interst accured but not due on loans
70
60
50
%
40
30
20
10
0
2004 2005 2006 2007
Year
Analysis:
From the above chart and diagram we find that the sundry
creditors and advances from customers contribute larger part of current
liabilities and it increases year by year.
89
• NET WORKING CAPITAL
Particulars 2004 2005 2006 2007

Net 904,053 863,788 1,587,870 2,302,765
Working
Capital
Net working capital
2500000
2000000
Amout in Rupees
1500000
1000000
500000
0
2003-04 2004-05 2005-06 2006-07
Year
Analysis:
As we show above chart we find that company’s capital

decreasing in the year 2004-05. But next year company bounced back and
had positive net working capital. And it is increasing since that time. It is
good sign for the company.
As shown in above diagram we can say that ECIL is having

good net working capital, which is good for growth of the company.
90
91
INTRODUCTION OF RATIO ANALYSIS
Introduction
Ratios are widely used tool of interpretation of financial statements. They
provide clues to the changes in the financial statements. Ratio analysis as
such is not the end by itself. Ratios, in fact identify the areas which require
further investigation. Ratio analysis involves computing and interpreting the
relationship between the relevant financial items. These financial items are
drawn from the various financial statements.
Ratios: what?
A ratio expresses a mathematical relation between two items. In the financial
ratios, these items are financial in nature and generally found in the balance
sheet/ income statement/cash flow statement. It can be expressed in as a
percent, rate, or proportion, or days.
Ratios: A tool for comparison

• Inter-firm comparison
• Intra-firm Comparison
Ratio Analysis: Increasing Importance

Many users rely on others to monitor/compare the performance of the
companies. Employees depend on the professional bodies, professional
trainers or the senior executives to monitor performance. Small investors
depend on their brokers or depend on the published literature. Now day’s
organizations, like ICICI Direct.Com, provide such help on line.
Professional fund managers develop their own research resources for such
an analysis. Many well known business schools and professional
organizations frequently conduct training programmers and workshop on
these issues.
92
There is a fierce competition to accumulate as much information as possible.
Such an effort increases the knowledge about the players, which in turn
helps in getting the best deal.
Ratio Analysis: Analysis of What?

Computation of ratio is easy but its analysis or interpretation is not. The
computation and interpretation of ratios is a subjective process. It depends
on the nature of the person using the information.
• A small investor is generally interested in the ability of

the company to pay the regular dividend.
• A large investor may be interested in the profit
generating ability of the company.
• An employee may be interested to know the ability of the
company to meet its expenses.
• A banker may be interested in the ability of the company
to service the debt on time and repay the debt when it matures.
• A professional manager may be interested in maximizing
the market capitalization of the company.
So there large number of ratios one can compute. However, to be

meaningful, a ratio must refer to an economically useful relationship. On the
basis of the functional relevance the ratios can be clubbed into the four
categories:
• Liquidity Ratios
• Solvency Ratios
• Profitability Ratios
• Efficiency Ratios
93
Liquidity Ratios:
A group of ratios, which help in analyzing the ability of the company to
meet the short-term obligations. These ratios show the following
• Relationship between the current assets and current liabilities: The

relationship shows the ability of the current assets to meet the current
liabilities and also it shows the mode of financing the current assets.
Following ratios provide such an understanding:
• Current Ratio
• Liquid Ratio
• Absolute Cash Ratio
• Composition of the current assets and current liabilities. The

composition shows the quality of the assets and liabilities. The quality
of current assets and current liabilities can be analyzed with the help
of the following ratios:
• Inventory Turnover Ratio

• Debtor Turnover Ratio
• Creditors Turnover Ratio
• Working Capital Turnover Ratio
Current Ratio:
94
The current ratio is the ratio of total current assets to total
liabilities. The ideal current ratio of any firm is 2:1. The current ratio of a
firm measures is short term solvency, that is, ability meet short term
obligations. The higher the current ratio, the larger is the amount of rupees
available per rupee of current liability, the more is the be firm’s ability to
meet current obligations and the greater is the safety of funds of short term
creditors. It is important to note that a very high ratio of current asset to
current liabilities may be indicative of slack management practices, as it
might signal excessive inventories for the current requirement and poor
credit management in term of over extended accounts receivables.
Current ratio = Current asset

Current liabilities
PARTICULER 2004-05 2005-06 2006-07

Current Asset 2150.81 2395.68 3873.57
Rs(in crore)
Current 11763.3 882.06 1551.47
Liabilities 2
Rs(in crore)
Current Ratio 1.83 2.71 2.49
Graphical Representation
95
3
2.5
2
2004-2005
1.5 2005-2006
2006-2007
1
0.5
0
1
Interpretation: From graphical representation we can observe that current

ratio improve from 2004-05 to 2005-06 means firm’s liquidity improved.
Higher ratio is preferable because it shows better short term solvency but
very high ratio of current ratio to current liability is indication of poor credit
management and firm may not make full use of its borrowing capacity.
QUICK RATIO:
96
Quick Ratio = Quick asset
Current Liabilities
It is a measurement ability to convert of firm’s ability to

convert its current assets quickly into cash in order to meet its current
liabilities. Thus it is quick or asset liquidity. The quick ratio is ratio between
current assets current liabilities and is calculated by dividing quick assets by
current liabilities. The ideal value of quick ratio is 1:1.
The term quick assets refers to current assets which can be

converted into cash immediately or at a short notice without diminishing of
value.
PARTICULAR 2004-05 2005-06 2006-07

Quick Asset 604.56 900.60 1827.88
Rs(in crore)
Current 1176.32 882.06 1551.47
Liabilities Rs(in
crore)
Quick Ratio 0.56 1.02 1.178
97
Acid test ratio is superior to the current ratio. An
acid test ratio of 1:1 is considered satisfactory as a firm can easily meet all
current claims. So from graphical representation we can observe that quick
ratio improved from 2005-06 to 2006-07. It means firm’s ability to meet
current liability increase.
1.2
0.8 2004-2005
2005-2006
0.6
2006-2007
0.4
0.2
0
Quick Ratio
Interpretation: Quick ratio shows liquidity of firm it’s same as current

ratio but it’s more stringent than current ratio. Because it exclude inventory
and advances means those current asset which can not easily convert in cash.
Liquidity in term of ability of firm to meet obligation immediately and that
can be meet current asset and those entire asset which can easily convert in
to cash.
INVENTORY TURNOVER RATIO

98
Inventory turnover ratio = Cost of goods sold
Average stock
The number of times the average stock is turned over during the year is
known as inventory turnover. It is computed by dividing the cost of goods
sold by the average in the business. The ideal valve of this ratio is 8 to 12
times. The ratio is very important in judging the ability of management with
which it moves the stock. The higher the turnover, the more profitable the
business would be. A low turn over indicates accumulation of slow moving,
obsolete and low quality goods, which is a danger signal to the management.
PARTICULAR 2004-05 2005-06 2006-07

Cost of goods 2574.29 3465.12 4205.04
sold
Average 637.63 813.75 1209.28
inventory
Inventory 4.03 4.25 3.48
turnover ratio
99
4.5
4
3.5
3
2004-2005
2.5
2005-2006
2
2006-2007
1.5
1
0.5
0
1
Interpretation: This ratio show mainly how fast inventories is sold in

year 2005-06 ratio is highest it means inventory sold at very rapid rate which
increase liquidity position of firm. From graph we can see on an average
ratio remain constant.
DEBTORS TURNOVER RATIO:
Debtors turn over ratio = Net credit sales

Average debtors
100
Net credit sales=Gross credit sale-return
Debtor’s turnover ratio supplements the information regarding the liquidity

of one item of current assets of the firm. The ratio measures how rapidly
debts are collected. A high ratio is indicative of shorter time leg between
credit sales and cash collection. A low ratio shows that debts are not being
collected rapidly.
PARTICULAR 2004-05 2005-06 2006-07

Sales Rs(in 3700.95 6116.71 6182.58
crore)
Average Debtors 339.26 432.48 505.73
Debtors 10.9 14.14 12.22
Turnover Ratio
16
14
12
10 2004-2005 Graphical
2005-2006
8
Representation
6 2006-2007
4
2
0
1 101
Interpretation: Debtors are one important part of current asset. Higher
ratio indicate shortest time lag between credit sales and collection of cash.
Ratio is increasing from 2005-06 shows that firm’s condition form liquidity
point of view improved means collection process becomes more efficient. So
firm required less working capital for its current operation.
DEBT TO EQUITY RATIO
D/E Ratio = Long term debt
102
Shareholder’s equity
The relationship between borrowed funds and owner’s capital is a popular

measure of the Long term financial solvency of a firm. The relationship is
shown by the debt-equity ratio. This ratio reflects relative claims of creditors
and shareholders against the assets of the firm. The relationship between
outsider’s claims and owner capital can be shown in different ways and
accordingly.
PARTICULAR 2004-05 2005-06 2006-07

Long term debt 4833.57 4876.64 8185.1
Rs(in crore)
Shareholder 1079.03 1038.25 2785.29
equity
Debt to equity 4.48 4.47 2.94
ratio
103
4.5
4
3.5
3
2004-2005
2.5
2005-2006
2
2006-2007
1.5
1
0.5
0
1
Interpretation: As per we can see debt ratio is very low in year 2006-07
compare to other year. At same time its very good condition from creditors
point of view because firm have enough funds to meet obligation. Ratio is
high in 05-06 which dangerous for creditors. If firms fail financially
creditors loose very high at same time interruption of creditors increase in
operation.
DEBT TO CAPITAL RATIO:

104
Debt to capital ratio = Long term debt
Permanent Capital
The relationship between creditor’s finds and owner capital can also be
expressed in term of another leverage ratio. Here, the outside liabilities are
related to the total capitalization of the firm and not merely to the
shareholders equity.
PARTICULAR 2004-05 2005-06 2006-07

Long term debt 4833.57 4876.64 8185.10
Rs(in crore)
Permanent 5822.87 5914.89 10970.39
Capital Rs(in
crore)
Debt to Capital 0.83 0.82 0.74
ratio
105
0.84
0.82
0.8
0.78 2004-2005
0.76 2005-2006
0.74 2006-2007
0.72
0.7
0.68
1
Interpretation: Ratio decreased from 2004-05 to 2006-07. Lower ratios

are better condition for creditors of firm. It means proportion in total capital
employed is very less compared to owner firms which so sufficient safety
margin available to creditor. But it reduces possibility of equity trading so
firm cannot utilize its ability for capital gearing.
OPERATING RATIO
Operating Ratio= Cost of good sold Operating Expenses

106
Sale * 100
It is ratio showing relationship between cost of goods sold plus operating

expenses and sales its shows the efficiency of the management this ratio
suggest that a particular share of selling price is absorbed by cost of sales
and other operating expenses and the remainder is left for the owner of the
business. Hence, the higher this ratio, the less profitable it is, because it
would prove insufficient to pay dividend and create necessary reserves.
PARTICULAR 2004-05 2005-06 2006-07

EBIT Rs(in 472.25 1542.46 1207.01
crore)
Sales Rs(in 3700.95 6116.71 6182.58
crore)
Operating Profit 11.73% 25.22% 19.58%
Ratio
107
30.00%
25.00%
20.00% 2004-2005
2005-2006
15.00%
2006-2007
10.00%
5.00%
0.00%
Interpretation: From graph we can see ratio is very less in year 2004-05
and its highest in year 2005-06.Now as the ratio showing firm’s ability to
meet expenditure means how much proportion of firm’s sale available to
meet seeling, general and financial expenses. The implication of high
expenses ratio is that only small percentage of sale is available for meeting
financial liabilities like interest, tax and dividend change in ratio is because
of different factor which cause change in selling price or operating expenses
like growing competition etc.
NET PROFIT RATIO
Net Profit Ratio=Net Profit / sales*100
108
Net profit margin is indicative of management ability to operate the
business with sufficient success not only to recover from revenue of the
period, the cost of merchandise or services, the expenses of operating the
business and the cost of borrowed funds but also leave a margin of
reasonable compensation to the owners for providing their capital at risk.
PARTICULAR 2004-05 2005-06 2006-07

Net Profit Rs(in 57.99 590.15 530.18
crore)
Sales Rs(in 3700.95 6116.71 6182.58
crore)
Net Profit Ratio 1.49% 9.65% 8.57%
109
10.00%
9.00%
8.00%
7.00%
6.00% 2004-2005
5.00% 2005-2006
4.00% 2006-2007
3.00%
2.00%
1.00%
0.00%
1
Interpretation: From graph we can see net profit margin was negative
means initially firm’s ability was so poor that it could not meet even
expenses. Than after firm’s ability improved day by day. On an average net
profit was high in the year 05-06 compare to other years.
RETURN ON CAPITAL EMPLOYED
110
Return on Capital Employed= EBIT/Share Capital+ Reserves+ Long term
Loan
Here the profits are related to the total capital employed. The term
capital employed refers to long term funds supplied by the creditors and
owners of the firm. Thus the capital employed basis provides a test of
profitability related to the sources of long tem funds. The higher the ratio,
the more efficient is the use of capital employed.
PARTICULAR 2004-05 2005-06 2006-07

EAT+INT.-TAX 409.59 1033.32 841.26
AVG. TOTAL 7152.33 7172.48 9367.5
CAP.
EMPLOYED
ROCE 5.72% 14.4% 8.98%
111
16.00%
14.00%
12.00%
10.00% 2004-2005
8.00% 2005-2006
6.00% 2006-2007
4.00%
2.00%
0.00%
1
Interpretation: From graph we can see ratio is very high in 05-06

compare to other year. Ratio improving year by year. From ratio we can see
firm utilize very efficiently its capital employed. Thus the capital employed
basis provided a test of profitability related to source of long term funds. In
year firm utilize its capital very efficiently which make firm to earn more
profit on capital employed.
RETURN ON SHAREHOLDER EQUITY
112
Return on shareholder equity=EAT/Average total shareholder’s equity
This profitability ratio carriers the relationship of return to the source

of funds yet another step further. While the ROCE express the profitability
of a firm in relation to the funds supplied exclusively the return on the
owner’s funds. The holders of preference share enjoy a preference over
equity shareholders in respect of receiving dividends.
PARTICULAR 2004-05 2005-06 2006-07

EAT Rs(in crore) 59.99 590.15 530.18
Avg.Total 704.69 1058.64 1895.14
Shareholder’s
Equity
ROSE 8.51% 56.74% 27.96%
113
60.00%
50.00%
40.00%
2004-2005
30.00% 2005-2006
2006-2007
20.00%
10.00%
0.00%
1
Interpretation: From this graph we can easily observe ratio is highest in

year 05-06 compare to other years. In that year return available to preference
as well as ordinary share holder is high. It will ultimately encourage investor
by providing attractive return and will prove very useful for firm to raise
fund for future growth.
CONCLUSION
114
Finally I like to conclude that through its uniqueness and
providing quality products, ESSAR has made its name on top in production
capacity and producing best quality products. It is a company which has
succeeded due to its hard work and sincerity of its employees. So it is truly
the employees company. Its success also lies in the co-ordination of its
different department. Here the relationship between them and it existed
without and discord. They believe ESSAR as their family and also in
positive attitude.
My summer training at ESSAE CONSTRUCTION was a

matchless and a one of a kind experience. This was the first time in my life
that I had a real and practical exposure to the vast corporate world, which I
am soon going to part of.
In short span, I got to learn a lot. I now have a better

understanding of how exactly the corporate culture works and how the
organizational culture should be defined.
The training was an enlightening experience to understand,

observe, associate and finally establish a link between the theoretical and
practical concepts in management.
BIBILIOGRAPHY
115
• ANNUAL REPORTS OF THE COMPANY
• REFERANCE BOOKS
FINANCIAL MANAGEMENT KHAN & JAIN
• WEBSITES
WWW. ESSAR.COM
WWW. MONEY CONTROL.COM
WWW. CONSTRUCTION INDUSTRY.COM
116
117
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A SUMMER TRAINING REPORT

VEHICLE FINANSIS AND MARKET RESEARCH

FOR PARTIAL FULFILLMENT OF P.G.D.M.

PARUL INSTITUTE OF MANAGEMENT

The undersigned MISS GARGI RABADIA a student of

The unit that, we have visited was PVT.ltd. Company.

I undersigned this project and this report was not

As per the syllabus prescribed by Saurashtra university

I have visited an industry that played dominant role to develop

To work the corporate environment of Essar has taught me all

I express my deep sincere gratitude to all those persons who have

First of all, I sincerely thank the management of Essar learning

I would like to thank Mr. AJOY GHOSE (Vice President ECIL)

I would like to special thanks to our principal and my project

1. ESSAR GROUP PROFILE

3. ESSAR CONSTRUCTIONS LTD. 41

5. SOURCES OF WORKING CAPITAL 57

6. HISTORY & RECENT TRENDS IN

7. WORKING CAPITAL STRATEGY

8. WORKING CAPITAL CYCLE AND

8.1 Factors influencing working capital 81

9. WORKING CAPITAL ANALYSIS 85

10. RATIO ANALYSIS 90

The project includes overview of company and the details of

The group’s enterprise value is approximately US$ 15 billion (Rs.

Essar is one of India’s largest corporate houses with leadership

The group takes pride in being a high-performance multinational

Essar power Limited set up India’s first new generation

Project under execution

Essar Power Limited is currently executing a captive gas based

Essar Power Limited has recently commissioned the 32 MW

Essar Shipping Ltd. (ESL) is e of the world’s leading integrated sea

Rig to refinery – and beyond

As an end-to-end sea logistics provider, ESL serves customers across

Third, to complete the integrated solution chain, their crude oil

A complete sea logistics provider

ESL is a truly global company, deriving nearly three-quarters of

Essar Shipping is one of the world’s lowest-cost operators with

Their vessels received the US Coast Guard’s AMVER award

Customer-led, flexible and Profitable

Their lean organization and management give them the

Exploration and Production

High automation, the latest technology and an ideal location on

Essar Teleholding Ltd. (ETHL) is holding company for the telecom

Essar teleholings Ltd. (ETHL) is the holding company for the

Essar along with Hong Kong bases Hutchison whompoa is one

Hutchison Essar Telecom Limited

From pipelines to ports, from industrial projects to intelligent

As one of India leading engineering, procurement and

They honed their skills as the turnkey contractor for most of

Simultaneously, they grew into a leading EPC contractor

Delighting customers, always

Little wonder, then, that a long and impressive list of client

Their clients can rely on our skilled, experienced team, a

Essar Information Technology Limited

EITL provides the full spectrum of services including

Launched in 2004, Paprika Media is the groups foray into

EATL is an established name in agriculture produce catering

Essar Argotic Limited was amongst the pioneers in the Indian