Working Capital Management and Stores Inventory Analysis

“Working Capital Management
and Stores Inventory Analysis”

At HINDALCO Industries
Hirakud Smelter
In partial fulfillment of the requirements for

the Post Graduate Diploma in Business Management.
INDIAN BUSINESS ACADEMY
Submitted by:
ARUN KUMAR SWAMI
FP 57/ 025
1
Hindalco Industries Limited
Hirakud Smelter
2
CERTIFICATE
This is to certify, that Mr. Arun Kumar Swami is a bonafide student of
Indian Business Academy, Bangalore and is presently pursuing a Post
Gradua te Diploma in Business Management.
Under my guidance, he has submitted his project report titled “Working

Capital Management and Stores Inventory Management at HINDALCO
INDUSTRIES LTD. Hirakud, Smelter” in partial fulfillment of the
requirement for the summer internship project during the Post Graduate
Diploma in Business Management.
This report has not been previously submitted as part of another degree or
diploma of another Business School or University.
Mr. Manish Jain, CEO ,

Lakshmipura, Thataguni Post
Kanakpura Main Road,
Bangalore – 560 062
INDIA
Tel: +91-80-28435931/34
Fax: +91-80-28435935
3
CERTIFICATE
Graduate Diploma in Business Management.
Under my guidance, he has submitted his project report “Working Capital

Management and Stores Inventory Management at HINDALCO
Prof. Subhas Sharma, Dean,

INDIA
Tel: +91-80-28435931/34
Fax: +91-80-28435935
4
CERTIFICATE

Graduate Diploma in Business Management.
Under my guidance, he has submitted his project report “Working Capital

Management and Stores Inventory Management at HINDALCO
Prof. K Subramaian , Professor,

INDIA
Tel: +91-80-28435931/34
Fax: +91-80-28435935
5
DECLARATION BY THE STUDENT
I, Arun Kumar Swami, hereby declare that this project report titled
“Working Capital Management and Stores Inventory Analysis”,
submitted in the partial fulfillment of Post Graduate Diploma In Business
Management course at Indian Business Academy is an original work carried
out by me at Hindalco Industries Limite d, Hirakud Smelter and has not
been submitted to any other University / Institute for a degree / diploma
course as a project earlier.
Arun Kumar Swami

FP 57/025
Indian Business Academy,
Bangalore.
6
ACKNOWLEDGEMENT
I would like to thank Indian Business Academy and Hindalco Industries

Limited for providing me such a great opportunity, which has been a good
learning experience of how corporate world functions.
I am thankful to Mr. Abhijit Pati, Vice President, Hindalco Industries Limited,

Hirakud Smelter, for considering me capable of doing this project.
I thank Mr. Sailesh Pati, Manager Accounts and Mr. Anil Agarwal, Manager
Materials, my project guides, for their continuous guidance and support
throughout the duration of this project.
Last but not the least; I am grateful to Prof. Asha Nadig my mentor at IBA for
her inspiration and continual support.
Arun Kumar Swami

FP57/025
Indian Business Academy,
Bangalore.
7
Table of Contents
Title Page No.
1. Executive Summary 1
2. Aluminium Outlook 4
2.1 Aluminium Global Outlook 4
2.2 Aluminium Sector Domestic Outlook 5
3. Hindalco An Industry Leader 7

3.1. Hindalco’s Vision 8
3.2. Hindalco’s Mission 8
3.3. Hindalco’s Values 8
3.4. Some Recent Milestones 9
3.4.1 Mergers and Acquisition 9
3.4.2 Joint Ventures 9
3.4.3 MOUs 10
4. Management and Business Organization 11
5. Hindalco’s Aluminium Business 13
6. Financial Highlights 2005-06 15
7. Smelter at Hirakud 17
7.1. Products 17
7.2. Different Sections of Smelter 17
8. Cost Structure 20
8
Title Page No.
9. Working Capital Management At Hirakud Smelter 22

9.1. What Is Working Capital? 22
9.2 Concepts of Working Capital 23
9.3. Working Capital Requirements 24
9.4 Working Capital Management 25
9.5. Approaches to Working Capital Management 26
9.5.1 Approach 1 26
9.5.2. Approach 2 28
10. Store s Inventory Analysis At Hirakud Smelter 32

10.1. Music 3D System 32
10.2. Inventory Classification 32
10.3. Parameters of Classification 34
10.4. Phase 1 37
10.4.1. Findings and Suggestions 38
10.5. Phase 2 41
10.5.1. Findings and Suggestions 42
11. Exhibits 47
12. Bibliography 64
9
1. Executive Summary
Aluminium Outlook:
The global aluminium industry witnessed a healthy growth backed by strong demand
from China, US and other Asian economies. In 2005, the world aluminium metal
prices increased by 6%. The domestic market has been growing at a rate in excess of
10%. The sustained strong growth in the sector could be attributed to the robust
performance of the Indian economy. The key consumer industries for aluminium are
electrical (power), transportation, consumer durables, packaging and construction.
Domestic aluminium companies have a significant exposure to the exports market.
Indian companies have the competitive advantage of being the lowest cost producers
of aluminium. To cater to the opportunities in the global market major aluminium
producers increasing their capacities through mergers, joint ventures and Greenfield
projects.
Hindalco:
The business of Hindalco Industries Limited is structured into two strategic

businesses — aluminium and copper — and is an industry leader in both these
segments. The company has a significant market share in all the segments in which it
operates.
Indian Aluminium Company Limited became a part of the Aditya Birla Group in June
2000, besides this Hindalco acquired a controlling stake in India Foils ltd. In April
2005, the company entered into MOUs with the Orissa and Jharkhand governments
for setting up a Greenfield alumina facility and aluminium facility in the states.
Financial High lights:

In the financial year 2006, Hindalco recorded highest ever turnover of Rs.11396.5
crore this is 20% more than last years. The aluminum segment contributed 53% and
copper segment contributed nearly 47 % to total net sales and revenue of Hindalco.
The net profits rose by 25% to Rs.1655.5 crore as compared to Rs. 1329.4 crore in FY
05. However the gross profit margin and the net profit margin are showing a declining
trend they have reduced from 49% and 30% in 2000-01 to 23% and 15% in 2005-06.
10
The company has posted its highest ever quarterly revenues and profits during the
fourth quarter ended 31 March 2006; the performance in the last quarter is a result of
steep increase in the aluminium prices world over.
Hirakud smelter:
The project was undertaken at Hindalco’s Hirakud Smelter. Hirakud smelter was
established in the year 1958 by Indal (now merged with Hindalco). It produces
aluminum metal by electrolytic process by reducing the alumina adopting the
Soderberg HSS Technology. The smelter plant has extended its capacity from
65,000tpa to 146000 tpa. In the last financial year the smelter operated at more than
100% capacity.
The products of Hirakud smelter can be classified into two major categories viz, Hot
Metal and Anode Paste. The hot metal products are transferred to sister concerns at
Belur, Alpuram and Taloja. The anode paste is produced for captive consumption and
some percentage is also sold to third parties.
Alumina is the major raw material and cos t component. It is procured from sister
concerns at Muri (70%) and Belgaum (30%). Nearly 2 tonnes of alumina is required
for producing 1 tonne of aluminium metal.
Power is the second most important input in smeltering. Hirakud smelter has its own
captive power plants to meet the power requirement. The capacity of the power plants
is being increased to 317.5 MW from 100 MW.
Working capital management:

Three months, namely August 05, December 05 and March 06, were selected on a
random basis for this analysis . The working capital fluctuates with fluctuations in the
operating level. The current assets and current liabilities were analyzed. The
organization does not have significant direct sales and the major raw materials are
also not procured from third partie s, hence, there are no significant trade debtors or
trade creditors.
The current ratio for the three months were satisfactory at 1.7 for Aug’ 05, 3.5for
Dec’05 and 2.5 for March’ 06. The quick ratio was also satisfactory at 0.59 in Aug,
1.28 in Dec and 0. 85 in March. The organization should try and keep the current ratio
close to 2 and quick ratio close to 1.
11
The major portion of investment in current assets is in Inventory. The inventory
consists of Raw materials, process stock, finished goods (Sales paste) and stores.
Around 63-66% of investment is in inventory. The organization should reduce this
investment by better material purchasing, handling and controlling. The raw
materials, process stock and finished goods directly depend on the production level.
But stores, that constitute 12-16 % of the total inventory, have no direct relation with
the production hence it should be kept as low as possible.
Stores inventory analysis:

The investment in stores at Hirakud smelter stood at Rs. 3.71 crores with close to
9000 items. Hindalco has SOP for its Purchasing and Stores department. Based on
this SOP the analysis was carried out using the MUSIC 3D system. Various inventory
techniques like ABC analysis, VED analysis, Lead time analysis etc. were used in this
ana lysis.
The analysis aimed at identifying those items in stores which are unnecessarily
blocking the capital, categorizing the stores and identifying the degree of control to be
imposed on each category of items. The analysis was carried on at two different
phases.
In the 1st phase of the analysis it was found that nearly 72% of the stores items
constituting 45% of the investment were non moving items. The items that should be
disposed off have been listed. This would bring down the inventory by 24% i.e. Rs
87.5 Lakhs. The 2nd phase categorized the items into 8 groups and suggested the
degree of control for each category. The report suggests the various strategies to be
followed to reduce the inventory level of the various categories of the items based on
the findings of the analysis.
12
2. Aluminium Outlook
2.1 Aluminium Global Outlook:

The global aluminium industry witnessed a healthy growth of nearly 10% in 2005.
According to CRU, global aluminium consumption grew at 5.9 per cent during 2005.
The strong demand trend is continuing with the primary consumption increasing by
6.2 per cent during the January-March quarter. Looking ahead, the demand is forecast
to grow at 6.2 per cent in 2006.
Strong demand for the metal from China and simultaneous improvement in
economies like the US and other Asian economies led to the strength in global
aluminium prices. China has been the largest contributor to this consumption increase,
with its investment-led growth model. There is also a significant demand in North
Amer ica, led by heavy truck and trailer production, aerospace, railcar and beverage
can segments. In addition, demand from the Middle East, Asia (excluding China,
Middle East and Japan), CIS and Eastern Europe continues to be healthy growing at
12 per cent dur ing the quarter.
The reported primary aluminium inventory data indicates stock consumption ratio at
6.7 weeks, which is close to historical lows. Inventories have declined considerably in
March as consumers have re-entered the market after a period of de-stocking.
Continued demand growth and low inventory levels make a case for aluminium prices
to remain strong.
This trend has continued well into the current fiscal with average international
aluminium prices for FY 06 (April-September) being higher by 8%.
In 2005, the world aluminium production increased by about 6.6%. Internationally,
the pattern of consumption is in favour of transportation, primarily due to large -scale
aluminium consumption by the aviation industry.
The per capita consumption of aluminium in India is abysmally low at less than 1 kg
as against nearly 25-30 kg in the US and Europe, 15 kg in Japan, 10 kg in Taiwan and
3 kg in China.
13
2.2. Aluminium Sector Domestic Outlook:
The Indian aluminium sector is characterized by large integrated players like
Hindalco and National Aluminium Company (Nalco). The other producers of primary
aluminium include Indian Aluminium (Indal), now merged with Hindalco. Bharat
Aluminium (Balco) and Madras Aluminium (Malco), the erstwhile PSUs, have been
acquired by Sterlite Industries. Consequently, there are only three main primary metal
producers in the sector namely Hindalco, Nalco and Sterlite. Hindalco has a market
share of around 47% (after merger of Indal) and Nalco’s share is 34% where as
Sterlite and others have a market share of 19%.
The domestic sector remains impressive, both in the immediate and the long term.
The market has been growing at a rate in excess of 10% and production of aluminium
has also increased by 6%. The market is expected to grow at a healthy rate in future as
well. The sustained strong growth in the sector could be attributed to the robust
performance of the Indian economy, which provided a boost to the aluminium user
industries like transportation, construction and electrical segments.
The key consumer industries in India for aluminium are electrical (power),
transportation, consumer durables, packaging and construction. The electrical (power)
sector has been the largest consumer of aluminium accounting for 44% of total
aluminium consumption. The demand from this sector is expected to increase on the
back of reforms in the sector. Government has taken various initiatives to create an
environment for increasing investments in this sector.
The automotive sector is the second largest user of aluminium. It consumes around
17% of total aluminium consumption. This sector has been growing at a pace of 16%
in last year and is expected to grow at a similar pace in future. India is fast becoming
a global hub of automobiles this will fuel the demand for aluminium further. Building
and construction and machinery sector constitute other users of aluminium.
14
Construction
and others Power sector
39% 44%
Automotive
sector
17%
Figure 1
Domestic aluminium companies have a significant exposure to the exports market.

Thus on hopes of the sustenance of the current recovery in world economies and the
bright prospects on the domestic front, major aluminium producers have been
increasing their capacities since the last couple of years.
Entry barriers to the industry are high mainly because of the large capital costs of an
integrated plant. Also, the industry is very power- and technology-intensive.
Production costs and product mix are the basis of competition in the industry.
Companies that have highly integrated production facilities including captive mines
and power plants as well as a product mix that leans towards value-added and semi-
fabricated products have an advantage over other manufacturers. In fact, integrated
aluminium manufacturers who use aluminium ingots produced in-house to
manufacture value-added products derive the maximum benefit from forward
integration since they can then take advantage of variations in aluminium prices.
High levels of operating efficiencies and capacity utilisation coupled with captive
power sources are the key determinants of profitability. Access to captive power,
cheap labour and proximity to abundant supply of raw material - bauxite have helped
make India one of the lowest cost aluminium producers in the world.
15
3. HINDALCO AN INDUSTRY LEADER
Hinda lco Industries Limited, a flagship company of the Aditya Birla Group, is
structured into two strategic businesses — aluminium and copper — and is an
industry leader in both these segments. A non-ferrous metals powerhouse, close to
global scale, it ranks among India's top 10 companies in terms of market
capitalizations.
Hindalco commenced its operations in 1962 with an aluminium facility at Renukoot

in the eastern part of Uttar Pradesh. Over the years, it has grown into the largest
integrated aluminium manufacturer in the country.
The company has a significant market share in all the segments in which it operates. It
enjoys a domestic market share of 47 per cent in primary aluminium, 63 per cent in
rolled products, 20 per cent in extrusions, 44 per cent in foils and 31 per cent in
wheels. The company enjoys around 90% market share in alumina chemicals i.e.
specialty alumina and hydrated alumina products.
The company exports about 17 per cent of its total sales volume of aluminium and
alumina chemicals to over 30 countries covering North America, Western Europe and
the Asian region.
Birla Copper, Hindalco's copper division at Dahej in Gujarat, also enjoys a leadership
position in India. Within three years of its commissioning it has a domestic market
share of over 40 per cent. It has also been successful in the export markets of the
Middle East, Southeast Asia, China, Korea and Taiwan.
16
3.1.
Hindalco’s Vision
To be a premium metals major, global in size and reach, with a passion for excellence.
3.2.
Hindalco’s Mission
To relentlessly pursue the creation of superior shareholder value by exceeding
customer expectations profitably, unleashing employee potential and being a
responsible corporate citizen adhering to our values.
3.3.
Hindalco’s Values
Integrity
Honesty in every action.
Commitment
On the foundation of integrity, doing whatever it takes to deliver, as promised.
Passion
Missionary zeal arising out of an emotional engagement with work.
Seamlessness
Thinking and working together across functional silos, hierarchy levels,
businesses and geographies.
Speed
Responding to stakeholders with a sense of urgency.
17
3.4. Some recent milestones:
3.4.1. Mergers and Acquisitions:
• A pioneer among the country's aluminium manufacturers, Indian Aluminium

Company Limited (Indal) became a part of the Aditya Birla Group in June
2000 as a subsidiary of Hindalco Industries Limited.
Hindalco paid Indal’s parent, Alcan of Canada, Rs 738 crore for its 54.6 per
cent stake in Indal @ Rs 190 per share, which is at a premium of Rs 70 over
Indal’s market price on 23 March 2000. It also made a public offer for a
further 20 per cent stake, which will take the total price to Rs 1,008 crore. That
makes it the biggest all-cash takeover deal in corporate India so far.
As per the scheme of arrangement announced by the board of directors of

Hindalco and Indal on 23 August 2004, all the business undertakings of Indal
other than the aluminium foil business at Kollur in Andhra Pradesh were to be
transferred to Hindalco Industries Limited by way of a demerger. The de -
merged units of Indal came under the corporate identity of Hindalco Industries
Limited. With this acquisition, Hindalco's market share in primary aluminium
production increased to 47 per cent.
• Hindalco also acquired a controlling stake in India Foils, which belonged to
the Khaitan Group. This acquisition was aimed at deepening its penetration in
the downstream segment.
• In FY 2002, Hindalco acquired the copper business of Indo Gulf Corporation
Limited, a Group company. Over the last two years, with a strategic intent to
achieve vertical integration, the copper business of Hindalco has acquired two
captive copper mines in Australia — Nifty and Mt. Gordon.
3.4.2. Joint Ventures:

Utkal Alumina International Ltd: The joint venture company is a subsidiary where
55 per cent equity is held by Hindalco while the balance is held by Alcan Inc. of
Canada. The company has proposed to set up an alumina refinery in Doragurha in
the Rayagada district of Orissa, to produce 1-1.5 million tonnes per annum (tpa)
of alumina, sourcing bauxite from the rich reserves at Baphlimali in Rayagada.
18
3.4.3. MOUs:
In April 2005, the company entered into MOUs with the Orissa and Jharkhand
governments for setting up a Greenfield alumina facility and aluminium facility
respectively, in the states. These include:
• In the state of Orissa the company has proposed to set up an integrated

Greenfield aluminium project with a capacity to produce a million tonnes per
annum of alumina and 260000 metric tpa of aluminum. This will be supported
by a 650 MW dedicated power plant backed by dedicated coal mines. The
MOU with Government of Orissa for land, water, bauxite, coal mines and
other necessary approvals has been entered.
• In the state of Jharkhand the company is considering establishment of a
smelter with a capacity of 325000 tpa backed by 750 MW power plant.
These recent milestones achieved by Hindalco will help it in increasing its market
share in Indian domestic market as well as in the global market. Acquiring Indal has
increased Hindalco’s market share by 7% from 40% to 47%. Similarly MOUs with
the government of Orissa and the government Jharkhand aims at achieving cost
efficiency through optimum utilization of vast resources in these states. These
strategic steps have been taken in accordance to Hindalco’s vision to be a metal major
and a global player.
Besides these milestones Hindalco is also expanding its production capacities. These
expansion plans cover almost all existing plants of Hindalco’s aluminium as well as
copper business divisions. To name a few the Renukoot integrated aluminium plant is
set to increase its smelter capacity by 1 lakh tpa to 3.42 lakh tpa, the alumina refining
capacity by 2.10 lakh tpa to 6.60 lakh tpa, and a matching increase in captive power
generation facilities by 150 MW to 769 MW , Muri plant is increasing alumina
capacity to 5 lakh tonnes per annum, similar expansion is going on at Hirakud
Smelter.
19
4. Management and business organization
The chairman of the company’s board of directors is Mr. Kumar Mangalam Birla. Mr.
Debu Bhattacharya is the Managing Director of the company. The other members of
board of directors are: Mrs. Rajashree Birla, Mr. A. K. Agarwala, Mr. C. M. Maniar,
Mr. E. B. Desai, Mr. S. S. Kothari, Mr. M. M. Bha gat, Mr. K. N. Bhandari.
Mr S. Talukdar is the Group Executive President and Chief Financial Officer.

Company Secretary of Hindalco Ind. Ltd is Mr. Anil Malik.
The Aluminium and power segment of Hindalco’s business has following persons
holding importa nt positions
• Mr Ratan K Shah, Chief Operating Officer (COO), aluminium and power,
Renukoot
• Mr S. M. Bhatia, COO, Indal units
• Mr. S. K. Maudgal, Chief Marketing Officer, primary metal, rolled products
and extrusions
• Mr Sumit Banerjee, Business Head, foil and alloy wheels
• Mr Shankar Ray, Business Head, chemicals
Mr. G. S. Khurana, Executive President, Renusagar power plant.
Hindalco’s organization is structured with autonomous business division. Each

division is responsible for its own production, development and marketing. Other
important functions are centralized viz. corporate finance, human resource
development, corporate planning, engineering projects and material management legal
and investor’s services, infector and corporate affairs.
The head of this business and function along with the managing director operation
constitute the management committee headed by the president and CEO. The
Hindalco management committee formulates strategic plans and polices. The
committee monitors and reviews the implementation of the company’s annual plan.
20
Shareholding pattern
Private corporate
bodies
5%
Banks and
financial
institutions
Promoters
17%
26%
Individuals
FII 31%
21%
Figure 2
The shareholding pattern of Hindalco is shown in figure 2. The company

being a public limited company majority of the shares is under the control of
individuals. This constitutes around 31% of the total share capital of the company.
The promoters of the company hold nearly 26% of the total shares of the company.
Out of the remaining 44%, banks and financial institution have control on 17% equity,
foreign institutional investors have 21% and other private corporate bodies hold
nearly 5 % of the total equity shares.
21
5. HINDALCO’S ALUMINIUM BUSINESS:
Hindalco is one of Asia's largest producers of primary aluminium and one of the most
cost-efficient producers globally. In India, Hindalco enjoys a leadership position in
specialty alumina, primary aluminium and downstream products. Hindalco’s
aluminium segment is vertically integrated through all stages of the business- form
bauxite, mining, alumina refining, power generation, and smeltering to semi-
fabricated products of sheets foil and extrusions as well as aluminum scrap recycling.
Hindalco units are spread all over the country.
All Hindalco units are ISO 9001:2000 and 14001 certified, and several have attained
the OHSAS 18001 — the occupational health and safety certification. On the export
front, the company has been accorded a Trading House status by the Indian
government.
Alumina
Refineries
Bauxite Mine Smelters
Coal Mine Extrusions

Aluminium
Business
Captive
Sheet Plant
Power Plant
Wheel Plant Foil plant
Figure 3
22
Hindalco aluminium business is broadly divided into off stream chemical
including, mining, and metals, power and down steam sheets, foils and packaging and
extrusions.
5.1. Production capacities
Division Capacity Location
Alumina chemicals 114,5000 tpa 685,000 tpa (Renukoot)
110,000 tpa (Muri)
350,000 tpa (Belgaum)
Primary aluminium 424,000 tpa 345,000 tpa (Renukoot)
65,000 tpa (Hirakud)
14,000 tpa (Alupuram)
Extrusions 21,700 tpa 13,700 tpa (Renukoot)
Rolled products 170,000 tpa 80,000 tpa (Renukoot)
45,000 tpa (Belur)
45,000 tpa (Taloja)
Wire rods 50,000 tpa 40,000 tpa (Renukoot)
Aluminium foil 11,000 tpa 5,000 tpa (Silvassa)
6,000 tpa (Kalwa)
Aluminium wheels 300,000 wpa Silvassa
23
6. Financial Highlights 2005 -2006
In the financial year 2006, Hindalco recorded a turnover of Rs.11396.5 crore, (Exhibit
1) which is 20% more than last years, which was Rs 9523.1 crore. This is highest ever
turnover recorded in the history of Hindalco. The net profits rose by 25 per cent to
Rs.1655.5 crore as compared to Rs.1329.4 crore in FY 05.
The net sales and operating revenue of Hindalco has been on an increasing trend. The
net sales and operating revenue has increased from Rs.2275.4 in 2000-01 to
Rs.11396.5 in 2005-06. (Exhibit 2 and 3)
The profits have grown in line with the increase in sales. However the gross profit
margin and the net profit margin are showing a decreasing trend. (Exhibit 4 and 5).
The profit margins were very high during 2000-01 and 2001-02; gross profit margin
and net profit margin were nearly 49% and 30% in both these years. In the financial
year ended 31/3/2005, the Gross profit margin has decreased to 23.02% in FY 05-06
from 24.96% in FY 04-05. The net profit margin has improved to 14.53% in FY 05-
06 as compared to 13.96 in the FY 04-05. But it is still very low as compared to the
previous 5 yrs.
Net sales and operating revenue Hindalco in the last four quarters has shown an
increasing trend (exhibit 2). It stood at Rs. 22,078 crore in the first quarter ended 30th
June 2005 which was 7% more as compared to the same period in FY 05. The net
sales and operating revenue were Rs. 26,608 crore and Rs. 28,737 crore in second and
third quarter respectively which were 6% and 15% less than last year. (Exhibit 6 and
7)
The company has posted its highest ever quarterly revenues and profits during the
fourth quarter ended 31 March 2006, net sales and operating revenues for the quarter
grew to Rs.3,657.4 crore from Rs.2,515.6 crore last year. Net profit for the period
moved in line reflecting an increase of 40 per cent from Rs.448.5 crore to Rs.626.3
crore. The performance in the last quarter is a result of steep increase in the
aluminium prices world over.
24
Aluminium business revenues in the last quarter rose to Rs.1726.3 crore up by 18.5
per cent. The segment profit registered a growth of 61.2 per cent to Rs.713.1 crore as
compared to Rs.442.4 crore in the corresponding period of previous year.
Copper business revenues increased significantly from Rs.1059.2 crore to Rs.1,931.7
crore, up 82.4 per cent. The segment profit improved to Rs.120.1 crore as compared
to Rs.64.6 crore a year earlier, aided by the incentives available under the Target Plus
scheme for impressive export performance. (Exhibit 11 and 12)
The contribution of aluminium segment in the total revenue of Hindalc o is 53% and
that of copper segment is 47%. Last year nearly 55% of the total revenue came from
Aluminium segment and remaining 45% was from copper segment. This shows that
there has been an improvement in the performance of the copper segment.
25
7. Smelter at Hirakud
Hirakud smelter was established in the year 1958 by Indal (now merged with
Hindalco). It produces aluminum metal by electrolytic process by reducing the
alumina adopting the horizontal stud, Soderberg (HSS Technology). The smelter plant
has extended its capacity from 30,000tpa to 65,000tpa and it is further being increased
to 146000 tpa to compete in the aluminum market by reducing the cost of production.
In the last financial year the smelter operated at more than 100% capac ity.
7.1. Products:
The products of Hirakud smelter can be classified into two major categories viz, Hot
Metal and Anode Paste.
• Hot metal is casted into different forms such as rolling ingots, commercial
grade ingots and cast coils rolling Ingots. These products are sent to the sister
plants for further processing into consumer products. Like to Belur for rolling
into different sheet product, Alpuram extrusion for extruded products and
Taloja for foil and packaging.
• Anode Paste is produced mainly for captive use in the smelting of alumina
into aluminium. Still some percentage is produced for sales to third parties.
7.2. Different sections of Smelter:
The smelter at Hirakud operates in a synchrony of the following sections:
7.2.1. Carbon Plant:
Carbon plant produces anode paste for the electrolytic cell (pots), for captive
consumption and a nominal quantity of sales paste also. Raw materials are Calcined
petroleum coke, Coal tar pitch and the final product of the plant is Carbon paste. This
paste is also know n as Soderberg paste.
Carbon paste is used as anode in the electrolytic cells (pots) for the extraction of
aluminum. This paste is sent to the pot rooms directly in the hot condition for captive
consumption. The paste produced for sales is casted into shapes like cylindrical or
cubical according to the customer’s requirement. The customers for carbon paste are
Ferro Alloy manufacturing companies.
26
Casting
Plant
Rectifier
Caster
Station
Plant
Carbon HIRAKUD
Pot room
Plant SMELTER
Human
Services
section resources
Other
Engineering
mechanical
Figure 4
7.2.2. Pot room:
In pot room alumina is electrolytically processed to produce molten aluminum. Its

raw materials are Alumina, Aluminium Fluoride, Cryolite, Calcium Fluoride and
Power.
Pot is a steel cell having a carbon cathode and anode, which is made up of carbon
paste. The alumina is processed using Soderberg (HSS Technology). The average
life of pot is 1500 days. The temperature of the pot is around 960oC. 54.4 KA and 4.5
V are maintained in a pot. All the raw materials are fed into the cell. The molten
metal produced is collected. A pot has a capacity to produces around 380 Kg/day.
7.2.3. Casting Plant:
Hot molten metal from pot rooms is brought in crucibles to the casting plant to cast
into pigs or ingots. The molten metal from the pot room are poured into two different
stationary furnaces having 20 metric ton capacity with oil fired burners. According to
27
the requirement alloying is done with different elements, like iron, copper, silicon
etc.Its’ products are Rolling ingot – 3500 Kg, 1-20 K ingot - 20 Kg and sow ingots.
There could be 1-20K ingot casting sometimes depending upon the requirement of the
customers
7.2.4. Caster Plant:
Hot Molten Aluminum from pot room is cast into thick coil of 5-6 mm in the caster
plant. Its main raw materials are hot molten Aluminum and alloying metals are Fe,
Cu, Si, and Mn etc. This department produces the 5-6 mm thick cast coil.
7.2.5. Rectifier Station:
In rectifier section Alternating Current (AC) is converted into Direct Current (DC)
because D.C is used for electrolysis of alumina to extract aluminum. For operation of
216 pots the voltage required is around 930 volts. The smelter for its functioning take
two 132 KV supply from Burla power House and it has its own power plant which
uses coal as fuel. The input current passes through 4 power transformers, which step
down the voltage to 11 KV.
7.2.6. Human Resources:

There are nearly 1000 employees working at Hirakud smelter. Out of these 200 are
staff employees and 786 are other employees. The Human resources department deals
with the all the affairs related to the employees.
7.2.7. Other services section includes the administration, accounts, traffic, purchases
and materials department.
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8. Cost Structure
The total cost of operating of Hirakud smelter is composed of following costs: Total
Raw Material cost, Total Period Cash Cost, Non Cash Cost, Cost of Alumina and
Power Cost.
Nearly 40% of the total cost is the cost of Alumina. 32% of the total cost is
contributed by Power. Raw materials and cash cost contribute 13% and 11%
respectively. (Exhibit13)
8.1. Alumina:
Hirakud uses the most commercially mined aluminium ore bauxite (alumina), as it has
the highest content of the base metal. India has the fifth largest bauxite reserves with
deposits of about 3 bn tonnes or 5% of world deposits. Production of 1 tonne of
a luminium requires 2 tonnes of alumina while production of 1 tonne of alumina
requires 2 to 3 tonnes of bauxite. Hirakud sources nearly 70% of its annual alumina
requirement from its sister refinery plant located Muri and 30% from Belgaum
refinery. The distance from the source is the main reason behind this pattern. Muri
plant is nearer as compared to the Belgaum Plant. Acquiring maximum amount of
Alumina from Muri Plant will save transportation cost. (Exhibit 14)
Since Alumina is the largest cost component any increase or decrease in the cost of
Alumina will have a significant impact on the cost of Hirakud Smelter’s operations.
8.2. Power:
Power is amongst the largest cost component in manufacturing of the non-ferrous
metal, as the production process - smelting - involves electrolysis. Consequently,
manufacturers are located near cheap and abundant sources of electricity such as
hydroelectric power plants. Hirakud smelter has been set up in vicinity of Hirakud
Dam for this reason. Hirakud smelter also has a captive thermal power plant of 67.5
MW capacity which was set up in 1993-94. Currently the power plant is enhancing its
capacity to 317.5 MW to cater the needs of electricity for expanded capacity of
smelter plant. Hirakud power plant is first power plant in India to use clean coal
combustion technology using a circulating fluidized bed. This is considered most
environment friendly in the field of coal fired power generation. (Exhibit 15)
29
Nearly 99% of the total power demand is now being met by the Hindalc o’s own
Captive Power plants. The remaining 1% is sourced from the WESCO. The cost of
producing power in the captive power plants is less than Rs.1 per unit whereas the
cost of power taken from WESCO is more than Rs. 3 per unit. By using captive power
plants Hirakud is saving Rs. 2 per unit. Thus utilizing more and more power from
cative sources is advisable.
8.3. Other Raw Materials:

The other raw materials are: Anode Paste, Calcined petroleum coke, Coal tar pitch,
Aluminium Fluoride, Cryolite, Calcium Fluoride and alloying metals like iron,
copper, silicon and magnesium. These all together constitute nearly 13% of the cost of
production.
While Anode paste is produced in house, materials like Cryolite have to be imported
from USA and Switzerland. The remaining materials are purchased from suppliers
from nearby states like West Bengal, Andhra Pradesh, Jharkhand.
8.4. Cash cost includes all day-to-day expenses like payment of salaries and wages,
payment to third parties for raw materials, transportation charges and other petty
expenditures. Non-cash cost includes depreciation, normal loss in the production
process, etc.
30
9. Working Capital Management at Hindalco Industries Hirakud Smelter
For the purpose of analysis three months were selected randomly. The months were
March ’06, December ’05 and August ’05. Before going into details of the project one
should know what is working capital? What are the concepts of working capital?
9.1 What is working capital?

Working capital is the amount of funds necessary to cover the cost of operating the
enterprise. Funds are needed for short-term purposes for the purchase of raw material,
payment of wages and salaries, and other day-to-day expenses. It is that part of firm’s
capital, which is required for financing current assets such as cash, marketable
securities, debtors, and inventories. Funds thus invested in current assets keep moving
fast and are being constantly converted into cash and these cash flows again get
converted into other current assets. Hence it is also known as revolving or circulating
capital.
Working capital is lifeblood of a firm. It is very essential to maintain the smooth

running of the business. The benefits of maintaining adequate working capital are:
• Helps the firm to maintain its solvency
• Ensures smooth flow of various business activities
• Exploit favorable market conditions
• Enables the firm to face business crisis like depression in the market
• Helps in creating and maintaining goodwill of the firm
• Enables the firm to arrange loans and other short term credits from banks on
easy and favorable terms
• Helps the firm gain confidence of the investors and creates favorable
conditions to raise funds in future
The investment in current assets should be sufficient to meet the needs of the firm.
Any form of excessive investment should be avoided because it reduces the
profitability, as idle investments earn nothing to the firm. Such a situation arises when
there is accumulation of inventory or the credit policy of the firm is not appropriate.
On the other hand inadequate amount of working capital can threaten the solvency of
31
the firm due to its inability to meet the daily obligation. The flow of business
activities is disturbed resulting in overall inefficiency of the firm.
9.2. Concepts of working capital
There are two concepts of working capital viz.

i. Gross working capital
ii. Net working capital
i. The Gross working capital represents the total amount of funds invested in current
assets. Current assets are those assets which in ordinary course of business can be
converted into cash within a short period of normally one accounting year. The
constituents of current assets are shown in part A of exhibit 16.
Gross Working Capital= Total Current Assets
The gross working capital concept takes into consideration the fact that every
increase in the funds of the firm will increase its working capital. Management is
interested in the gross concept of working capital as it is more useful in
determining the rate of return on investments in the working capital.
The gross working capital at Hindalco for the three months under review was
Rs.479751398, Rs. 565853633 and Rs. 505773890 in March, December and
August respectively. (Exhibit 17)
ii. Net working capital represents the excess of current assets over the current
liabilities. Current liabilities are those which are intended to be paid in ordinary
course of business within a short period of normally one accounting year out of
the current assets or income of the business. The constituents of current liabilities
are shown in part B of exhibit 16.
Net Working Capital= Current Assets - Current Liabilities
The net working capital concept is a qualitative concept that indicates the firm’s
ability to meet its operating expenses and short-term liabilities. It also indicates
the margin of protection available to the short-term creditors.
The net working capital for the three months was Rs. 28.80crores in March, Rs.
40.38 crores in December and Rs. 20.83 crores in August. (Exhibit 17)
32
9.3. Working capital requirements:
Working capital requirement differs from organization to organization. In case of an

organization engaged in manufacturing like Hirakud smelter the working capital
requirement depends on factors like nature and size of business, scale of operation,
length of production cycle, rate of stock turnover, seasonal fluctuations, market
conditions, business cycle, rate of growth of the business, socio-economic conditions,
etc.
The amount of funds tied up in working capital would not typically be a constant
figure throughout the year. Only in the most unusual of businesses would there be a
constant need for working capital funding. For most businesses there would be
weekly fluctuations. Many businesses operate in industries that have seasonal changes
in demand. As in case of Hirakud smelter the working capital does differ from one
month to other.
In principle, the working capital need can be separated into two parts:
1. A fixed part, and
2. A fluctuating part
The fixed part is probably defined in amount as the minimum working capital
requirement for the period. It is widely advocated that the firm should be funded in
the way shown in the figure 5.
The more permanent needs (fixed assets and the fixed element of working capital)
should be financed from fairly permanent sources (e.g. equity and loan stocks); the
fluctuating element should be financed from a short-term source (e.g. a bank
overdraft), which can be drawn on and repaid easily and at short notice.
33
Figure 5
9.4. Working capital management
Working capital management entails short term decisions - generally, relating to the
next one year period - which is "reversible". The working capital management refers
the management of current assets and short term liabilities. It is concerned with short
term financial decision making involving cash flows within the operating cycle of the
firm. The goal of Working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both maturing
short-term debt and upcoming operational expenses.
The need for working capital management arises from two considerations;
• First, the investment in current assets represents a substantial portion of total
investment. Therefore the investment in current assets and the current
liabilities have to be geared quickly to changes in sales.
• The firm’s fixed assets can be used at an optimum level only if supported by
sufficient working capital.
In working capital management, a financial manager has to make decisions involving
some of the considerations as follows: -
34
• What should be the total investment in working capital of the firm?
• What should be the optimum level of individual current assets?
• Wha t should be the relative proportion of different sources to finance the
working capital requirements?
• Should the firm have a conservative working capital policy or a restrictive
working capital policy?
• What should be the credit policy of the firm?
The importance of working capital management is reflected from the fact that
financial managers spend a great deal of time in arranging short term funds,
controlling the movements of cash, administering accounts receivables, investing
short term surplus of funds. Hirakud Smelter is concerned about the first four
considerations only, because there are no major debtors.
9.5. Approaches to Working Capital Management
Working capital management can take two approaches:
1. Monitor overall trends in working capital and identify areas requiring closer
management.
2. Analyze the individual components of working capital.
9.5.1. Approach 1:
The first approach, i.e. monitoring overall trends in working capital and identifying
areas that require closer management, involves study of the relationship of various
current assets and current liabilities with each other and other items like sales, cost of
production, etc. the tool used is Ratio Analysis :
Financial ratio analysis calculates and compares various ratios of amounts and
balances taken from the financial statements. The main purposes of working capital
ratio analysis are:
• To indicate working capital management performance; and

• To assist in identifying areas requiring closer management.
35
Financial ratio analysis is valuable because it raises questions and indicates directions
for more detailed investigation.
Since most of the production is transferred to sister concerns and raw materials are
also transferred from sister concerns it neither has debtors nor creditors. The
following ratios are of interest for managing working capital at Hirakud Smelter.:
• Current ratio
• Quick assets ratio
• Cash ratio
Current ratio:
Current Assets divided by Current Liabilities
The current ratio (or working capital ratio) attempts to measure the le vel of liquidity,
that is, the level of safety provided by the excess of current assets over current
liabilities. This ratio comes out to 1.7 for Aug’ 05, 3.5for Dec’ 05 and 2.5 for March’
06.
The higher the current ratio the better is the solvency position of the firm. However in
interpreting the current ratio the composition of the assets and the production level
should be kept under consideration. As a rule of thumb 2:1 ratio is considered
satisfactory. (Exhibit 20 and 21). The current ratio during this month was the lowest
only due the fact that the production level during the month was the high using most
of the current assets. The liquidity position of Hirakud smelter is satisfactory.
March' 06 December '05 August '05

Current Ratio 2.50 3.49 1.69
Quick Ratio 0.85 1.28 0.58
Cash Ratio 0.06 0.07 0.03
Quick ratio:
The "quick ratio" a derivative, excludes inventories from the current assets,
considering only those assets most swiftly realizable. The ratio is calculated as:
36
Quick assets/ current liability.
Quick assets are defined as current assets excluding the inventories. Inventories are
excluded from this ratio because inventories are deemed to be the least liquid assets.
This ratio is also known as Acid test ratio. During Aug’ 05 this ratio comes out to be
0.59, for Dec it was 1.28 and for March it was 0.85. As a rule of thumb 1:1 ratio is
considered to be satisfactory. The organization should try and keep the quick ratio
closer to 1.
Cash ratio:
Since cash is the most liquid asset it is very impor tant to monitor study the cash ratio.
Cash ratio is the most stringent tests of a firm’s liquidity. It is calculated as:
Cash at bank + Cash in hand/ Current liabilities.
The cash ratios for the last three months are 0.06, 0.07 and 0.03 for March, December
and August respectively. The cash ratio of Hirakud smelter is satisfactory.
9.5.2. Approach 2:
Management should use a combination of policies and techniques for the management
of working capital. These require managing the current assets - generally cash and
cash equivalents, inventories and debtors. There are also a variety of short-term
financing options which are considered.
• Cash management - identify the cash balance which allows for the business
to meet day to day expenses, but reduces cash holding costs.
Hirakud Smelter has done well to keep the cash holding less than the planned
Rs.1 lakhs. In the three months under review the cash in hand amounted to Rs.
52 thousand, Rs. 74 thousand and Rs. 52 thousand in March, December and
August respectively. Cash at bank during the three months has been
significantly higher than the planned amount of Rs.4 lakhs. In December it
was Rs. 9113307, in August it was Rs. 12291631 and in March it was Rs.
13034141.
37
A weekly forecast of the cash requirements is done and this is sent to the
Hindalco head office in Mumbai for the sanction of the cash. For control
purposes various cash reports are prepared on daily basis and weekly basis.
Hirakud smelter has its bank accounts in Punjab National Bank, State Bank Of
India, United Commercial Bank and Grind lays Bank PLC.
• Invento ry management - identify the level of inventory which allows for

uninterrupted production but reduces the investment in raw materials and
hence increases cash flow. The stock of raw materials is more than the planned
stock. The stock in process is higher which shows that the smelter is operating
at a higher capacity as planned. The stock of metal in all forms is less than the
planned stock.
It is seen that the majority of the investment is in form of Inventory. Since the
quick assets are only 34 % of total current assets the remaining 66% is
contributed by the inventory in the month of March. (Exhibit 23). Similarly the
% of inventory in the current assets is 63 and 65 for the months of December
and August respectively.
The inventory at Hirakud consists of raw materials, process stock, finished

goods and others. In the month of August the raw materials constituted nearly
11 % of the total inventory, similarly in December and March the % of raw
materials in the inventory was 9% and 9% respectively.
The processed stock constitutes nearly 40%, 36% and 70% in the March,
December and August respectively. The process stock in the month of August
is high because of high production level.
The finished goods i.e. sales paste constituted nearly 2% of total inventory in
March, 1% in December and 1% in August.
The remaining portion of the inventory constituted of other items like stores
and spares, scrap etc. the stores and spares constitutes nearly 12% -16% of the
total investment in inventory. (Exhibit 23)
A major part of the inventory i.e. raw material and process stock is in the form
of stock in transit. In the month of Aug the materials in transit amounted to
nearly 60% of the total raw materials. In December the stock in transit
38
amounted to 40% and in Mach it amounted to 45% of the total stock. The
organization should look forward to reduce the inventory in transit.
This shows that if the investment in the inventory could be reduced then the
total investment in the working capital could be reduced to a significant le vel.
The Raw materials, finished goods and process stock level is directly related
to the level of production. The organization follows various inventory control
techniques like EOQ, ABC analysis, VED for controlling and managing the
inventory properly. Stores and spares that also contribute heavily to the
investment in current assets. It is generally seen that organizations do not put
much emphasis on the inventory of spares, as it has no direct relation to the
production. Hirakud smelter being a manufacturing unit pays a considerable
amount of attention on keeping the investment in stores and spares as
minimum as possible.
• Short term financing - inventory is ideally financed by credit granted by the

supplier; dependent on the cash conversion cycle, it may be necessary to
utilize a bank loan (or overdraft).
The Hindalco head office at Mumbai supports the short term funds
requirement of Hirakud smelter. Weekly forecast of funds required is done at
Hirakud smelter which is then sent to head office. After receiving the
requisition the funds requested is made available to Hirakud smelter. The
forecasts need to be very accurate, as all the expenses and the payments
depend on the funds received from the Head office.
The sales paste production is based on advances received from the customers.
This is also done at the HO; the party concerned has to contact the HO for this
purpose. Similarly the third party suppliers of raw materials are paid by the
HO.
The organization also has bank overdraft facility with various banks like State
Bank of India, Punjab National Bank, United Commercial Bank, etc. Bank
overdraft for the three months were Rs.3.97crores in March, Rs.1.61 crores in
February and Rs.1.11 crores in the month of January. The interest charged on
bank overheads was Rs. 141190 in March, Rs. 42665 in February and Rs.
12674 in January.
39
The general tendency in the case of manufacturing concern is that during
certain period in a year the need for current asset will be much higher than in
other period. Arrangement should be made quickly, taking into account the
cost benefit trade off.
So it is clear that working capital management encompasses the management of

current assets and means of financing them. The objective of working capital
management balance the liquidity and profitability criteria while taking into
consideration the attitude of management trend risk and the constraint imposed by the
banking sector while providing sort term credit in the form of cash credit/ bank
overdraft. There is a minimum amount of net working capital, which is; permanent
hence a part of working capital should be financed with permanent source of fund.
40
10. STORES INVENTORY ANALYSIS AT HIRAKUD SMELTER
The investment in stores and inventory at Hirakud is nearly Rs. 3.71 crores. Hindalco
Ind. Ltd. has its own standard operating system for Purchases and Stores
management. In developing this SOP all Hindalco units have been consulted and the
best practices of the various units have been compiled. The SOP aims at bringing
uniformity and standardization in procedures to ensure effective planning, execution
and control.
The standard operating system for stores management applicable to all Hindalco units
is called the MUSIC 3D system.
10.1. MUSIC 3D system

MUSIC 3D system is used for inventory control; it stands for Multi unit selective
inventory control system. It is a 3 dimensional concept that integrates Consumption
Value, Criticality and lead-time giving eight different parameters that are easily
controllable.
The following table shows the MUSIC 3D system matrix:
High Consumption Value Low Consumption Value
Long lead time Short lead time Long lead time Short lead time
Critical 1 2 3 4
Non- Critical 5 6 7 8
Figure 6 Spares classification under MUSIC 3D
The above MUSIC 3D dimensions are used for defining 8 different varieties of
inventories as expressed as above. The words like HIGH/ LOW/ LONG/ CRITICAL/
NONCRITICAL may have different cut off points for different Units.
For the purpose of stores control the various items have to be classified into various
categories.
41
10.2. Inventory Classification:
For the application of this system it requires a proper classification of the various
items. As such the Stores inventory (consumables and spares) at Hirakud smelter
consists of three categories of items:
v Insurance items
v Auto indented i.e. regular items
v User specified i.e. department indented items
Insurance Spares:
The items under this category are spares of vital equipments/ machinery, which are
normally not required for routine maintenance, but may be required for unforeseen
breakdown causing stoppage production or cause unsafe working conditions or
significant energy losses directly or indirectly.
Normally such items have high degree of reliability, having same life as the
equipment itself and are of high value and long lead-time.
Auto indented items:

These are the items whose indent is generated automatically by the inventory
management software- Ramco Marshal MMS system version 3.0, it operates on a
SQL platform. As and when the inventory approaches the reorder level the software
automatically decides the inventory replenishment quantity and intimates the purchase
department to issue a purchase order. The items falling under this category are
regularly used items and are a part of regular maintenance.
The software to operate needs various inventory levels to be fixed. Minimum,
maximum and reorder level for all stores items is fixed and then fed to the system.
These levels are fixed on the basis of:
• Lead-time history i.e. minimum lead time, normal lead time and maximum
lead time
• Demand i.e. average consumption, minimum consumption and maximum
consumption.
• Economic order quantity, EOQ Model is a model that defines the optimal
quantity to order that minimizes total variable costs required t o order and hold
inventory. It attempts to reduce the overall cost of the inventory.
42
• Inter process cost
• Cost per unit of the item
User specified items:

These include those stores and spares, which have been purchased based on specific,
requisition from the user department and are specific and unique to the equipment and
the processes. In this category there are two sub headings:
• Consumables stores and spares: these are the items that are to be replaced after
a fixed life and the respective consuming departments are placing the indents
for future consumption.
• Specific spares: these are those spares where the need for consuming that
particular spare is immediate. The ideal stock for such items is ‘0’.
MUSIC 3D cannot be applied to insurance spares. Inventory of insurance spares
depends on the risk taking ability of the unit management. So for the purpose of
MUSIC 3D only Auto indented and user specified items have to be further classified
into sub groups.
10.3. Parameters of classification:

This classification is based on the following parameters:
v Consumption pattern in terms of both quantity and value
v Lead time whether high lead time or low lead time
v Criticality of application whether critical or not
v Movement of the items i.e. number of issues during last 3 years
• Classification of items based Consumption pattern results into three categories of
items viz. A B and C. this also known as ABC analysis:
An analysis of consumption cost shows that a smaller % of items in the stores
contribute to a larger % of the va lue of consumption and on the other hand a larger %
of items in the stores contribute to a smaller % of the value of consumption. Between
these two extremes fall those items the % number of which is more or less equal to
there value of consumption.
The items that fall under 1st category are treated as A, items that fall under the second
Category are treated as B and the third category items are treated as C items. This
43
technique is also referred to as Always Better Control or the Proportional Parts Value
analysis.
The significance of this analysis is that a very close control is exercised over the items
of A group because they account for high % of value while stringent control is
adequate for the category B items and little control is sufficient for category C items.
The features of ABC technique are shown in the following table.
Name Category A Category B Category C
1. Extent of Very strict Moderate control Loose control
Control control
2. Frequency of Frequent ordering Once in a 3 months Once in a 6
order months or once in
a year
3. Lead time Maximum efforts Moderate efforts to Minimum efforts
to reduce lead reduce lead time to reduce lead time
time
4. Level of Must be taken Can be supervised by Can be supervised
Management care of by the the middle by the clerical staff
intervention senior officers management
5. Period of review Review after a Review within a Annual review
month or 15 days period of 2-3 moths
of waste, obsolete
and surplus items
6. Source of As many sources More than three Three reliable
supplies as possible reliable sources sources
7. Follow up Maximum follow Periodic follow up Minimum follow
up up
8. Safety stocks Very Low safety Low safety stock High safety stock
stock
The SOP of Hindalco suggests application of 80- 20 rule, i.e. the High and low
consumption value is determined based on 80-20 concept. Top 20% of items
accounting for nearly 80% of the consumption value are deemed as high value items
and balance 80% of items that contribute nearly 20% of the consumption value are
44
deemed as low consumption value items. Although 80- 20 are suggested norms these
are not sacrosanct and in actual practice it may range from 85-75% and 25-15%.
At Hirakud smelter the top 5% items that have maximum value are grouped A, next
10% items are B and remaining 85% are grouped as C items. The items under
category A and B are grouped together to form high consumption value items.
Another classification based on the above method is to be done for current stock value
of all the items and categorize them, as X, Y and Z. this analysis is known as XYZ
analysis. The items whose current stock value is among top 5 % are classified as X
items, next 15-20% are grouped as Y and remaining as Z items. It is quite similar to
the ABC analysis the only difference being the classification is based on the current
stock value and not the consumption value.
• Based on Lead-time the items in the stores are classified as high lead time items or
low lead time items. Lead -time is the amount of time required for an item to be
available for use from the time it is ordered. Lead-time includes purchase order
processing time, vendor -processing time, in transit time, receiving, inspection, and
any prepack times.
Items having lead-time greater than three months for imported items and 45days for
domestic items are classified as high lead-time items and those having lead-time less
than high lead time periods are classified as short lead-time items.
• Based on criticality auto indented and user specified are again classified into sub
heading
v Critical items
v Non critical items
This classification is done to facilitate CONTROL purpose, MIS and to a certain
extent accounting requirement also. The classification of items into critical and non-
critical is based on the VED analysis. Under this classification the items are first
classified as Vital, Essential and Desirable. The user department identifies the
criticality by keeping in view the following definitions as per the SOP:
Critical items are those spares of vital equipment having reliability lower than
insurance items non availability of which will cause stoppage of plant or reduce
45
production level or cause unsafe working conditions or significant energy losses
directly or indirectly. These include vital spares and essential spares. A spare of
equipment having a standby will also come under this category as standby is supposed
to come into operation instantaneously in the event of stoppage of the main
equipment. Such an item has high consequential loss.
Non critical items are those spares required for normal maintainance but do not fall
in critical category, i.e. non availability would not cause stoppage of plant or reduce
the production level or cause unsafe working conditions or significant energy losses
directly or indirectly. It ha s low consequential loses and has normally short lead-time.
• Based on movement of the items in the inventory are classified as fast moving (F),
slow moving (S) and non moving items (N).
Regular or fast moving items are those items that have consumption pre dictability.
They are issued more than 9 times in last three years. For auto-indented items the
period under review is reduced to one year.
Slow moving items are those, which have been issued at least once and up to 9 times
in last three years. For auto-indented items the period under review is reduced to one
year.
Non-moving items are those, which have not been issued even once in the last three
years. For auto-indented items the period under review is reduced to one year.
The activities involved in MUSIC 3D system inventory control system are divided
into two phases. Phase 1 provides a broad classification and analysis of the items and
facilitates the analysis in the second phase:
46
10.4. Phase 1
Step 1: All the items are classified on the basis of the criticality, movement and
current stock value into 18 following categories:
i. Critical, Fast moving, High value items
ii. Non critical, Fast moving, High value items
iii. Critical, fast moving, medium value items
iv. Non critical, fast moving, medium value items
v. Critical, fast moving, Low value items
vi. Non critical, fast moving, Low value items
vii. Critical, slow moving, High value items
viii. Non critical, slow moving, High value items
ix. Critical, slow moving, medium value items
x. Non critical, Slow moving, medium Value items
xi. Critical, Slow moving, Low Value items
xii. Non critical, Slow moving, Low Value items
xiii. Critical, Non moving, High value items
xiv. Non critical, Non moving, High value items
xv. Critical, Non moving, medium value items
xvi. Non critical, Non moving, medium value items
xvii. Critic al, Non moving, Low value items
xviii. Non critical, Non moving, Low value items
Step 2: the above items are represented in a diagrammatic form with number of items
in each category and current stock value. Fig.7
Step 3: the groups under non-moving category are to be analyzed separately and will
have separate treatment as well. The remaining groups are also to be analyzed for
abnormalities.
10.4.1. Analysis after phase 1
In this analysis the main importance is given to the non-moving items. These are
those items, which have not moved even once in last 3 yrs, there are many such items
which have not been issued since last 6- 8 yrs. There is a possibility that many items
may have got damaged or may have become obsolete. The items are judged on the
basis of there crit icality, value and numbers. The items in the exhibits are a part of the
classified items that require immediate attention.
47
Figure 7. Spares Classification On The Basis Of Criticality, Degree of Movement and Value (Rs. Lakhs)
No. of items:
8431
Value
Rs.518.98
Critical Non critical

No. of items: No. of
311 items:8120
Fast Slow None moving Fast Slow None moving

No. of items: No. of items: No. of items: 83 No. of items: No. of items: No. of items:
107 121 Value: Rs. 6.86 677 1685 5758
Value: Value: Rs. 36.96 Value: Rs.74.59 Value: Rs136.46 Value:
Rs.103.95 Rs.160.08
X X X X X X
No. of items: No. of items: No. of items: 3 No. of items: No. of items: No. of items:
21 17 Value: Rs 1.96 30 45 55
Value: Rs Value: Rs Value: Rs Value: Rs Value: Rs
Y Y Y Y Y Y
No. of items: No. of items: No. of items: No. of items: No. of No. of
35 19 14 91 items184 items230
Value: Rs 6.78 Value: Rs 4.37 Value: Rs 3.63 Value: Rs Value: Rs Value:
Z Z Z Z Z Z
No. of items: No. of items : No. of items: No. of No. of items: No. of items
51 85 66 items556 1456 5473
Value: Rs 1.51 Value: Rs 2.13 Value: Rs 1.27 Value: Value: Value:
48
Findings and suggestions after analysis in Phase 1:
i. A major portion of the stores inventory has been classified as Non moving
items. The total current stock value of these items is Rs. 1.66 crores, in terms
of percentage of total stores value it is nearly 45%.
This shows that most of the items in the stores are non-moving items. If the
organization could reduce the inventory of these items it is possible to save a
significant amount of investment and reduce the overhead cost associated with these
items. L osses due to obsolescence and damage could also be reduced
ii. The items in Exhibit 24 list1 • Eligible for immediate attention
3 items constitutes Rs.1.96 lakhs • Decision should be taken to qualify
them as insurance spares.
Features: • If they do not qualify as Insurance
• Critical in nature spare they may be sold.
• High stock value • The condition of the items should be
physically examined and verified
before taking the decision.
• Minimize the working capital
investment
Should be Procured on Just in Time basis
iii. Items worth Rs. 3.63 lakhs fall • Should be verified and decision to
under this category. Out of these items, be taken to declare them as
a few are listed in exhibit 25 list 2 insurance spares.
• The remaining items could be sold
Features: immediately.
• Critical in nature • This step will reduce the inventory
• Medium value items. by Rs. 190000
• Minimum control on these items is
sufficient
The remaining items of this category should be sold and minimum control should be
directed towards these items.
iv. There are nearly 84 various items • Minimum possible inventory should
falling under this category. The be maintained
items in exhibit 26 list 3 have: • These items should be sold.
49
• By there sales the stores could
Features: reduce the inventory by Rs. 55000
• Low value • It will reduce the time spent in
• Large numbers monitoring and controlling a large
• Non critical number of items
• Save inventory storage space
• Inventory as low as possible should

There are nearly 7 other items that are in be maintained.
very less numbers but have higher values • These items should also be sold.
exhibit 27 list.4 • This would reduce the inventory by
Rs.44000
v. Items in Exhibit 28 list 5 are • Minimum inventory should be
• Non critical in nature maintained
• Have high stock value • If possible should be sold to reduce
the investment in the stores by Rs.4.65
lakh.
vi. Items in exhibit 29 list 6 • Should be sold immediately
• Non critical • The sales of these items will reduce
• No significant stock value. the investment in inventory by Rs
230000
• Save stores space as the number units
will be reduced.
vii. Items that have been classified • Should be sold to reduce the
under this category amount to Rs. 3.37 inventory by Rs. 3374458.
lakhs in value. • Save the inventory space
• Non critical • Reduce the efforts in controlling these
• Nonmoving items
• Low value items
After this analysis it was found that it is possible to reduce the inventory of stores and
spares by Rs. 87.5 Lakhs i.e. from Rs. 3.71 crores to 2.83 crores. In other words it
is possible to reduce the investment in stores by 24%. Before taking any action the
50
management should undertake physical verification of the stores items. Utmost care
should be taken in declaring the critical, non-moving items as Insurance spares. The
cooperation of various other departments should be taken in this process. This will not
only reduce the working capital investment but will also reduce the chances of loss
due to obsolete inventory, save the stores space and reduce the indirect costs
associated with the stores.
10.5. Phase 2
Step 1: the items classified as fast moving and slow moving items are again classified
on the basis of criticality, consumption value and lead time. This classification would
result into 8 groups of items:
i. Critical, Long lead time, High consumption value

ii. Non critical, Long lead time, High consumption value
iii. Critical, Short lead time, High consumption value
iv. Non critical, Short lead time, High consumption value
v. Critical, Long lead time, Low consumption value
vi. Non critical, Long lead time, Low consumption value
vii. Critical, Short lead time, Low consumption value
viii. Non critical, Short lead time, Low consumption value
Step 2: the items classified as above are shown diagrammatically as in fig. 8. This
will lead to the actual MUSIC 3D classification and analyzing eight groups becomes
easier.
Step 3: Each group is then analyzed for abnormality.
10.5.2. Analysis after the Phase 2:

This analysis is aimed at identifying those items, which need stringent control, and
those items, which can be disposed to reduce the inventory size.
51
Figure 8. Spares Classification under MUSIC 3 D
HIGH CONSUMTION VALUE LOW CONSUMTION VALUE

Consumption Value Consumption Value
Rs. 1223.34 lakhs Rs.7.90 lakhs
No. Of Items 370 No. Of Items 2222
LONG LEAD TIME SHORT LEAD LONG LEAD TIME SHORT LEAD
TIME TIME
CRITICAL Consumption Value Consumption Value Consumption Value Consumption Value
Rs. 375.55 Rs. 516.03 Rs. 1.95 Rs.6.41
No. Of Items 36 No. Of Items 58 No. Of Items 37 No. Of Items 97
NON CRITICAL Consumption Value Cons umption Value Consumption Value Consumption Value
Rs. 123.42 Rs. 208.32 Rs. 21.20 Rs. 49.46
No. Of Items 87 No. Of Items 189 No. Of Items 516 No. Of Items 1572
• Items having movement i.e. category F and S items only were selected for the purpose of this classification.
• Criticality c lassification is based on VED analysis. Items falling under V and E grouped as critical.
• Consumption value based on ABC analysis items in category A and B grouped as High consumption and category C items taken as Low
consumption value items.
• Long lead time = 45 days or more.
52
Findings and suggestions:
i. The consumption value of the items analyzed in this phase is Rs. 13.02 crores
ii. No. Of Items 36 • Adequate stock should be

Consumption Value of Rs.3.75 crores maintained.
• Strict control should be imposed on
Features: these items
• Critical in nature • Efforts should be made in the
• High consumption value direction of maintaining proper
• Long lead time stock, reducing the lead-time and
the cost per unit.
• The organization must look for
multiple sources of the items.
• Stock outs should be avoided.
• The working capital investment
should be as low as possible.
iii. No. Of Items 58 • Stock value of less than the above

Consumption value Rs. 5.16 crores category items is suggested.
• Strict control should be imposed on
Features: these items
• Critical • Efforts should be made in the direction
• High consumption value of maintaining proper stock and the
• Short lead time cost per unit.
• The organization must look for
multiple sources of the items.
• The working capital investment should
be as low as possible.
53
iv. No. Of Items 37 • Maximum inventory should be
Consumption value Rs. 1.95 lakhs maintained
• Critical • The orders placed should be of large
• Low consumption value quantities even annual orde rs could be
• Long lead time placed for 2 yrs consumption
• Adequate level of inventory could be
maintained.
v. Consumption value Rs.6.41 • Stock level lower than the above

crores mentioned items
Features: • Orders should be placed in large
• Critical quantities.
• Low consumption value • The ordered quantity may be for 4- 6
• Short lead time months requirement
• No stock outs
vi. No. Of Items 87 • Just in time inventory system should be

Consumption value1.23 crores used
• Non Critical • Attempts to be made to reduce the costs
• High consumption value • Low inventory level should be
• Long lead time maintained.
• Surplus inventory should be avoided.
• Moderate degree of control
• Physical verification of the inventory is
recommended.
vii. No of items 189
Consumption value Rs. 2.08 cro res • Very low inventory should be
• Non Critical maintained if possible ‘0’ inventory is
• High consumption value suggested
• Short lead time • Attempts to be made to reduce the
costs.
54
• Surplus inventory should be avoided.
• Moderate degree of control
• The items could be sold
viii. No. of items 516

Consumption value Rs. 21.20 lakhs • Moderate inventory level should be
• Non Critical maintained
• Low consumption value • Stock out is possible
• Long lead time • Low degree of control is sufficient
• Reduce the inventory level by selling
the surplus items.
ix. No. of items 1572 • Very low inventory level should be
Consumption value Rs. 4946802 maintained
• Non Critical • Stock out is possible
• Low consumption value • Low degree of control is sufficient
• Short lead time • Verify the physical condition of the
items and sale the obsolete inventory.
The analysis distinguishes items that should be under highest degree of control from
those items, which do not require much monitoring. This would save the time and
money spent in controlling the inventory. Focusing on controlling the critical items
that have high consumption value will help in controlling major portion of the
investment in the stores inventory. Besides the above recommendations the following
should also be followed:
1. Increase Demand Forecasting Accuracy. The demand for the items in store
should be accurately forecasted. If demand were accurately known then this
would help in reducing the unnecessary items in the inventory. The demand for
the items that are fast moving and regularly consumed could be easily predicted.
2. Increase Supply Chain Turns. Using EOQ model is suggested for but the non-
critical items may be purchased on Just in time basis, as minimum inventory has
to be maintained. This may increase acquisition costs and unit costs because of
55
smaller order quantities. But will be beneficial in increasing cash flow and
reducing carrying cost of the inventory (warehousing, material handling, taxes,
insurance, depreciation, interest and obsolescence). The organization should
make sure that it has reliable sources of supply for the items that are critical for
its operations as well as for those items which have high lead time.
3. Reduction in safety stock . Safety stock is really just a buffer for forecasting
variance and supplier delivery time. It is possible to reduce the Safety stock
levels through improvements in demand forecasting, increasing accuracy in
forecasting, manufacturing cycle efficiency, supply chain turns, reliable
suppliers. The safety stock for non critical items and non moving items should be
as low as possible
4. Reduce purchasing errors . This can reduce overstocking and more importantly,
minimize stock outs that result in expensive expedited purchases. Sell excess and
obsolete inventory or return it to your vendor.
5. Eliminate delivery variance. Do not allow vendors to deliver early or late and
make sure the delivered quantity does not vary from the order quantity. Delivery
errors may lead to overstocking of the items in the inventory.
6. Train purchasing personnel. Provide your purc hasing and material

management personnel with formal training. This will arm them with better
negotiating skills that will result in better prices and terms.
7. Physical verification should be an integral part: There should be a regular

inspection of critical items it could be done on a weekly basis. Non-critical items
having high consumption value should also be physically inspected. This would
reduce the chances of loss due to obsolescence, damage, mishandling, etc.
8. Proper reporting: Reports on the consumption pattern and current stock value
should be prepared on a monthly basis. Any abnormalities in the stores should be
brought to the notice of the management as soon as possible.
56
9. The inventory analysis using the MUSIC 3D system and other tools should be
done on a regular basis. The SOP of Hindalco recommends this analysis to be
done once a year. The recommendations of SOP should be followed.
57
11. Exhibits
Exhibit no 1
Financial results for the Year ended 31-3-2006 and Year ended 31-3-2005
Year ended Year ended

Particulars
31-3-2006 31-3-2005
Net Sales & Operating Revenues 113,965 95,231
Other Income 2,439 2,700
87,914 72,456
Total Expenditure
(a). (Increase)/Decrease in Stock in Trade -10,338 -2,557
(b). Consumption of Raw Materials 66,034 46,396
(c). Staff Cost 4,627 4,116
(d). Manufacturing and Operating Expenses 23,223 20,112
(e). Other Expenditure 4,368 4,398
Interest & Finance Charges 2,252 1,700
Gross Profit 26,238 23,766
Depreciation 5,211 4,633
Profit before Tax & Extra Ordinary Expenses 21,027 19,133
Extra Ordinary Expenses -30 91
21,057 19,042
Profit before Tax
Provision for Tax 4,502 6,464
(a). Provision for Current Tax 3,241 5,705
(b). Provision for Deferred Tax 1,160 759
(c). Provision for Fringe Benefits Tax - 101
Net Profit for the period 16,555 13,294
Paid -up Equity Share Capital (Face Value :
986 928
Rs.10/ - per Share)
95,077 75,738
Basic & Diluted EPS (Rs.) 16.8 14
58
Exhibit 2
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Net sales and operating
22754 23314 49856 62084 95233 113,965
revenue
Profits before tax and
9801 10050 10627 12456 19133 21,027
extraordinary items
Net profit 6781 6860 5821 8389 13294 16,555
Exhibit 3
Net sales and Revenue and Net Profits
120000
100000
Rs. in Millions
80000 Net sales and operating

revenue
60000
Net profit
40000
20000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
59
Exhibit 4
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Gross Margin % 49.33 49.73 26.62 25.18 24.96 23.02
Net Margin % 29.8 29.42 11.68 13.51 13.96 14.53
Exhibit.5
Gross profit Margin and Net profit Margin

60
50
40
Gross Margin %
30
Net Margin %
20
10
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
60
Exhibit 6
Quarterly results for the financial Year 2005-2006
Particulars 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

Net sales and operating revenue 22078 26,068 28,737 36,574
Gross profit 5,919 5,267 5,635 9,417
Profit before tax and
4,750 3,982 4,321 7,974
extraordinary items
Net profits 6,263 2,765 3,006 6,263
Exhibit 7
Particulars
% change in % change in % change in % change in
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Net sales and
operating
revenue 7.0 6.14 15.40 45.38
Gross profit
26.33 -12.68 -11.8705 41.50
Profit before tax
and
extraordinary
items 30.92 -19.50 -18.45 51.62
Net profits
165.83 -7.21 -13.44 39.64
61
Exhibit 8
Net Sales and Operating Revenue In Rs. millions
40,000
35,000
30,000
25,000 Net Sales and Operating
Revenue For FY 2005
20,000
Net sales and Operating
15,000 Revenue For FY 2004
10,000
5,000
0
Exhibit. 9
Profit Before tax and extraordinary items in Rs. In millions
9,000
8,000
7,000
6,000 Profit Before Tax and Extraordinary
5,000 items for FY 2005
4,000 Profit Before Tax and Extraordinary
3,000 items
2,000
1,000
0
62
Exhibit 10
Net Profits In Rs. in millions
7,000
6,000
5,000
4,000 Net Profits for FY 2005

3,000 Net Profits for FY 2004
2,000
1,000
0
Exhibit 11
Quarterly Segment revenue for the Financial Year 2005-2006
Particulars 1st 2nd 3rd 4th

Quarter Quarter Quarter Quarter
ended ended ended ended
30/06/05 30/09/05 31/12/05 31/3/06
1. Segment Revenue
1 3,406 14,141 15,644 17,263

(a). Aluminium
(b). Copper 8 ,677 12,464 13,084 19,317
2. Segment Results (Profit/Loss before

Tax and interest from each Segment)
(a). Aluminium 4,384 4,345 5,421 7,131
529 -692 -845 1,201

(b). Copper
63
Exhibit 12
Segment performance for the Financial Year ended 31-3-06 and Year ended 31-3-05
Particulars Year ended Year ended % %

31-3-06 31-3-05 Contribution Contribution
1. Segment Revenue
(a). Aluminium 60,423 52,129 53.02 54.74

(b). Copper 53,542 42,712 46.98 44.85
113,965 95,231
Net Sales & Operating Revenues 113,965 95,231

2. Segment Results (Profit/Loss
before
Tax and interest from each
Segment)
21,281 15,927
(a). Aluminium
193 253.8
(b). Copper
Exhibit 13
cost structure
Total Raw Materials

13%
Total Period Cash
Power A/C - Kwh/T Cost: Total Raw Materials
32% 11%
Total Period Cash Cost:
Depreciation Depreciation
4%
Alumina
Power A/C - Kwh/T
Alumina
40%
64
Exhibit 14
Alumina Mix
Belgaum Plant
30%
Muri Plant
70%
Exhibit 15
Power Mix
WESCO
4%
Hirakud Power
Hirakud Power Line I
Line II 46%
50%
65
Exhibit 16
Part A Part B
Current Assets Current Liability
Cash in hand Sundry creditors
Cash at bank Trade advances
Loans and Advances Borrowings:
Trade debtors Short term borrowings
Inventories: Bank overdraft
Raw material and Components Provisions
Work in process
Finished Goods
Others
Exhibit 17
Total Current Assets 479751398 565853633 505773890
Net Working Capital 288014103 403783942 208242403
Planned Working
Capital 326650000 326650000 326650000
Quick Assets 164593188.5 207648265.5 175367845.8
Non Quick Assets 315158209 358205368 330406044
% Quick Assets 34 37 35
% Non Quick Assets
(Inventory) 66 63 65
66
Exhibit 18
Current Assets and Quick Assets
600000000
500000000
400000000
Total current assets
300000000
Quick assets
200000000
100000000
0
Exhibit 19
Net working capital for last three months
450000000
400000000
350000000
300000000
250000000 Net working capital

200000000
Planned working
150000000 Capital
100000000
50000000
0
67
Exhibit 20
March' 06 February '06 January '06
Current Ratio 2.502128757 3.491421678 1.69990039
Quick Ratio 0.858430746 1.281228241 0.589409369
Cash Ratio 0.068251309 0.07629911 0.030804569
Exhibit 21
Ratios
4
3.5
3
2.5 Current ratio
2 Quick ratio
1.5 Cash ratio
1
0.5
0
68
Exhibit 22
Current Assets Mar’06 Dec’06 Aug’06

Bank 13,034,141 12,291,631 9,113,307
Cash 52,180 74,142 52,022
Raw Materials 29,015,239 32,959,647 35,312,862
Process Stock 125,507,097 128,670,904 232,203,154
Finished Goods 6,657,204 3,864,099 1,959,831
Stores And Inventory 50,045,118 41,454,727 41,724,965
Metal In All Form 103,933,551 151,255,991 19,205,232
Deposits 51,905,689 71,272,524 115,305,267
Prepaid 4,137,200 1,807,898 7,004,594
Loans To Employees 11,990,916 11,942,663 12,402,260
Advances 41,262,353 16,001,203 2,042,439
Claims 14,671,986 23,631,939 11,971,986
Misc. Receivables 12,107,590 22,306,049 9,186,586
Mod Vat Claims 15,431,133 48,320,216 8,289,386
Others 0.00 0.00 0
Total Current Assets 479,751,398 565,853,633 505,773,890
Quick Assets 164,593,189 207,648,266 175,367,846
Current Liability Mar’06 De c’06 Aug’06

Electricity Bill 11,509,562 15,077,563 157,418,895
MRR Liability 49,252,461 57,153,725 43,839,465
Misc. Creditors 49,280,864 36,255,961 36,160,131
Sal/ Wages Payable 12,417,409 17,318,699 24,013,195
Freight Payable 29,082,065 19,518,534 24,460,217
Sales Tax Payable 449,518 592,284 530,924
Octroi Payable
Bank Overdraft 39,745,415 16,152,926 11,108,660
Total Current Liability 191737294 162069691 297531487
69
Exhibit 23
March % Dec % Aug %
Raw Materials 29015239 9 32959647 9 35312862 11
Process Stock 125507097 40 128670904 36 232203154 70
Finished Goods 6657204 2 3864099 1 1959831 1
Others 153978669 49 192710718 54 60930197 18
Total 315158209 358205368 330406044
250000000
200000000
Raw Materials
150000000
Process Stock
100000000 Finished Goods
others
50000000
0
March December August
70
Exhibit 24
List 1
Stock Description Current Current

number stock stock
value
RELAY COMPARATOR MODULE 6
RSS026O068 DC 3002 -1CC,T NOS 5 76468
PPS051O030 PITCH DELIVERY PUMP COMPLETE NOS 2 52735

2" DIAMETER DEWRANCE BRONZE
PPS002O008 PARALLELL SL NOS 4 67408
Total 196611
Exhibit 25
List 2
number stock stock
value
PPS108O008 SEQUENCE CONTROLLER MA-810, NOS 3 40435

SPARE KIT, FOR LT. LK. TRIPLE POLE
CHS011E002 CONT SET 6 35424
DODGE TIMKEN BRG.UNIT FLANGE
BRB030O006 UNIT TYPE E NOS 2 33072
Total 108931
71
Exhibit 26
List 3
Stock number Description Current Current
stock stock
value
MAGNESIA COMPOUND 1ST QUALITY85% IN 25
IJP000O204 K KG 375 2340
EWR000O036 TRS CIRCULAR FLEXIBLE CABLE 660/1100 VOL MTR 175 5032
GLP000O017 WHITING POWDER G.I.BBS GRADE IS-63-1978. KG 174 1176

DUMMY BUSH OUTER HEAT TREATEDAND
PRS001M003 GROUND NOS 107 5234
SINGLE CORE PVC INSULATED COPPER (KDK
EWR000O053 MA MTR 85 1184
CLS030O002 ALUMINIUM WIRE BRAIDED TAPE TO FIT SILIC NOS 50 1950
4Cx6sq.mm ANNEALED TINNED COPPER
EWR000O040 CONDUCT MTR 41 4946
AUS002M017 FUSIBLE PLUG (WORKSHOP FABRICATED). NOS 35 1225
ETR000O155 ELECTROLYTIC GRADE BARE COPPER WIRE, KG 32 4729

HWM004O020 GALVANISED IRON WIRE ROPE GRIP WITH NUT NOS 30 722
MES051O007 ACETYLENE HOSE. MTR 29.5 846
EMS000O102 SIEMENS MAKE HRC FUSE 100 AMPS , TYPE- 3 NOS 29 8713
HWM004O021 G.I.WIRE ROPE GRIP AS PER IS-2361 WITH G NOS 28 612
MES048O005 DOUBLE WIRE BRAIDED HOSE 1/2"I.D AS PER MTR 27.5 4271
IJP000O116 RELIABLE FELT PACKING, MTR 22.9 393

WHITE DRY ASBESTOS ROPE PLAINCOVER IN
IJP000O082 RO KG 21 5142
EMS000O103 SIEMENS L-T HIGH RUPTURING CAPACITY FUSE NOS 20 6421
Total 54936
72
Exhibit 27
List 4
number stock stock
value
PPS106O003 IGNITION TRANS NOS 3 9185
SIEMENS BIMETALLIC RELAY 12-24
EMS000O139 AMPS. NOS 4 6776
PRS001M141 C.I.FOOT OPERATED PEDAL VALVE, NOS 3 6725

DOUBLE ROW SPHERICAL ROLLER
BRB013M001 BEARING (SKF NOS 2 6530
CYLINDRICAL ROLLER BEARING [
BRB010O 012 SKF CRL 18 NOS 2 5200
BURNER ROD ASSEMBLY WITH
PPS004O009 NOZZLE. NOS 2 5153
AIR FLEXIBLE HOSE PIPE FOR ENCON
FBS001O052 BURNER, PCS 3 4604
Total 44173
73
Exhibit 28
List 5
number stock stock
value
PPS071O148 SPLIT RING GEAR:SPLIT RING GEAR SET 1 603200
CLS034O010 XQM3 CARD:XQM3 CARD NOS 1 397788

FBS005O041 PLC 540 CONTROL NET:PLC 540 CONTROL NET NOS 1 369200
DC SPEED CONT 140AMP:DC SPEED CONT
CST013E040 140AM NOS 1 273490
FBS005O021 SIGNAL CONVERTER:SIGNAL CONVERTER NOS 1 238867
CLS034O009 XGT BOARD:XGT BOARD NOS 1 178496
PPS004O034 COIL FOR TP-06 NOS 1 163568

ACTUATOR FOR DAMPER:ACTUATOR FOR
CST011O027 DAMPER NOS 1 156412
BRB014O010 ANTIFRICTION B EARING, SKF-29440 NOS 1 123531

CONTROL NET BACK-UP:CONTROL NET BACK-
FBS005O042 UP NOS 1 122120
PRS026O003 BOARD HV UNIT:BOARD HV UNIT NOS 2 249600
RSS006O005 DRY TYPE L.V.BUSHING NOS 3.001 329726

DC VOLTMETERP M M C.DC VOLTMETERP M M
PRS026O001 C. NOS 89 50038
CST001O024 LUBORGAN:LUBORGAN LTR 160.003 460498
PRS015O007 FIRE BRICK NOS 361 54241

PRS015O047 REPAIRING OF POT SID:REPAIRING OF POT SI NOS 447 574688
MNF101O040 ALUMUNIUM ANGLE KG 580 63313
MNF000O108 AL.FLAT BUS BAR KG 1912.4 172605
Total 4648871
74
Exhibit 29
List 6
number stock stock
value
MTF008O014 M.S. ROD KG 1050 18585
MTF008O016 M.S. ROD KG 670 12127
MTF004O013 MS CHANNEL 300x90 KG 626 18029
MTF008O018 M.S. ROUND, KG 610 10797
OLL000O014 ANTI-MOSQUITO OIL. LTR 400 10855

CHOCK END COVER GASK:CHOCK
CST013O160 END COVER GAS NOS 400 10816
MNF101O016 ALUMUNIUM ANGLES KG 270 29486
PRS015O200 "O" RING:"O" RING NOS 259 13080

HARD DRAWN BARE CONDUCTOR
ETR000O151 COPPER WIRE, KG 209 21918
M.S.PIPE CLASS`C' CONFIRMING TO
PPF002O001 ISS-1239 MTR 205 11877
DOOR ARCH BRICKS,AS PER ITEM NO-
FBS001O011 4,OF OUR NOS 200 25689
GLC000O062 SCALEKOL ACID & SOLUTION KG 160 10816
Total
75
12. Bibliography:
Financial Statements:
1. Annual Reports Hindalco Ind. Ltd.

2. Trial balances Hirakud Smelter for the month of March’06, December’05 and
August’05
3. Stores Items Master
Reference books:
1. Financial Management- Theory And Practice- Prasanna Chandra

2. Management Accounting- R.K. Sharma and Sashi. K. Gupta
3. Cost Accounting- S.P. Jain And K.L. Narang
Internet
1. www.Hindalco.com
2. www.domainb.com
3. www.iif.edu
4. www.hinduonnet.com
5. http://contents.icicidirect.com/research/aluminium.asp
6. www.planware.com
7. www.investoapedia.com
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“Working Capital Management

and Stores Inventory Analysis”

In partial fulfillment of the requirements for

INDIAN BUSINESS ACADEMY

Under my guidance, he has submitted his project report titled “Working

Mr. Manish Jain, CEO ,

Under my guidance, he has submitted his project report “Working Capital

Prof. Subhas Sharma, Dean,

This is to certify, that Mr. Arun Kumar Swami is a bonafide student of

Under my guidance, he has submitted his project report “Working Capital

Prof. K Subramaian , Professor,

Arun Kumar Swami

I would like to thank Indian Business Academy and Hindalco Industries

I am thankful to Mr. Abhijit Pati, Vice President, Hindalco Industries Limited,

Arun Kumar Swami

Title Page No.

3. Hindalco An Industry Leader 7

4. Management and Business Organization 11

5. Hindalco’s Aluminium Business 13

6. Financial Highlights 2005-06 15

9. Working Capital Management At Hirakud Smelter 22

10. Store s Inventory Analysis At Hirakud Smelter 32

The business of Hindalco Industries Limited is structured into two strategic

Financial High lights:

Working capital management:

Stores inventory analysis:

2.1 Aluminium Global Outlook:

Domestic aluminium companies have a significant exposure to the exports market.

Hindalco commenced its operations in 1962 with an aluminium facility at Renukoot

3.4.1. Mergers and Acquisitions:

• A pioneer among the country's aluminium manufacturers, Indian Aluminium

As per the scheme of arrangement announced by the board of directors of

3.4.2. Joint Ventures:

• In the state of Orissa the company has proposed to set up an integrated

Mr S. Talukdar is the Group Executive President and Chief Financial Officer.

Mr. G. S. Khurana, Executive President, Renusagar power plant.

Hindalco’s organization is structured with autonomous business division. Each

The shareholding pattern of Hindalco is shown in figure 2. The company

Bauxite Mine Smelters

Coal Mine Extrusions

Wheel Plant Foil plant

5.1. Production capacities

Division Capacity Location

Alumina chemicals 114,5000 tpa 685,000 tpa (Renukoot)

110,000 tpa (Muri)

350,000 tpa (Belgaum)

Primary aluminium 424,000 tpa 345,000 tpa (Renukoot)

65,000 tpa (Hirakud)

14,000 tpa (Alupuram)

Extrusions 21,700 tpa 13,700 tpa (Renukoot)

8,000 tpa (Alupuram)

Rolled products 170,000 tpa 80,000 tpa (Renukoot)

45,000 tpa (Belur)

45,000 tpa (Taloja)

Wire rods 50,000 tpa 40,000 tpa (Renukoot)

10,000 tpa (Alupuram)

Aluminium foil 11,000 tpa 5,000 tpa (Silvassa)

6,000 tpa (Kalwa)