A STUDY OF THE OPERATING CYCLE AND CASH CYCLE OF STERLITE IND

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Sterlite Industries India Limited (SIIL) is the principal subsidiary of Vedanta Resources plc, a diversified and integrated FTSE 100 metals and mining company, with principal operations located in India and Australia.

Sterlite's principal operating companies comprise Hindustan Zinc Limited (HZL) for its fully integrated zinc and lead operations; Sterlite Industries India Limited (Sterlite) and Copper Mines of Tasmania Pty Limited (CMT) for its copper operations in India/Australia; and Bharat Aluminium Company (BALCO), for its aluminium and alumina operations and Sterlite Energy for its commercial power generation business.

Sterlite is India's largest non-ferrous metals and mining company and is one of the fastest growing private sector companies. Sterlite is listed on BSE, NSE and NYSE. It was the first Indian Metals & Mining Company to list on the New York Stock Exchange.

Sterlite has continually demonstrated its ability to deliver major value creating projects, offering unparalleled growth at lowest costs and generating superior financial returns for its shareholders. At the same time, it ensures that its expansion projects meet high conservative financial norms and do not place an unwarranted burden on its balance sheet and financial resources.

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A majority of company's operations are certified to the International Standards like ISO 9001, ISO 14001 and OHSAS 18001. SIIL laboratories at Tuticorin and Silvassa have been recognized with ISO 17025:2005 certification from National Accreditation Board for Testing and Calibration Laboratories (NABL). The company is LME approved copper tester. Our copper products meet the requirement of Restriction of Hazardous Substances (RoHS complied) and certified by Underwriters Laboratories Inc. SIIL's Central lab at Silvassa is a GoI approved R&D laboratory. The company has also won numerous awards for safety and environment.

Sterlite develops and manages a diverse portfolio of mining and metals businesses to provide attractive returns to its shareholders whilst carrying out its activities in a socially and environmentally responsible manner and creating value for the communities where it operates. As one of the largest metals and mining groups in India, Sterlite remains continually committed to managing its business in a socially responsible manner. The management of environment, employees, health and safety and community issues, in respect of its operations is central to the success of company's business.

HISTORY OF COMPANY

1986-Sterlite Cables Limited, acquires the Shamsher Sterling Corporation, changes the name to Sterlite Industries ( India) Limited.

1988-Sterlite Industries makes an initial public offering of its shares on the Indian stock exchange.

1991-Sterlite Industries establishes India's first continuous copper rod plant.

1997-Commissions first privately developed copper smelter in India at Tuticorin in Tamil Nadu.

1999 -Acquires Copper Mines of Tasmania Pty Ltd.

-Acquires Thalanga Copper Mines Pty Ltd.

2005-Expansion of Tuticorin Smelter to 300,000 TPA and Successful ramp up of ISA furnace in a record period of 45 days.

2006-Expansion on Tuticorin smelter to 400 KTPA through innovative debottlenecking.

2007-Sterlite Industries primary listing on NYSE in June 2007

VISION & MISSION

VISION 2015

To be the world's leading copper producer delivering sustainable value to all stakeholders by leveraging technology and best practices.

MISSION

To build a knowledge and process driven organization through TPM

To create sustainable value through safe, clean and green processes

To sustain leadership position in domestic and global market through market development and customer delight.

To be the best and most respectable corporate citizen

To leverage technology to its full potential across the business cycle

To harness the profitable and growing CCR/value added product from 240KMT to 600 KMT per annum.

To achieve Zero cost and beyond

To secure raw material through long term contracts and captive mines

AWARDS & RECOGNITIONS

2009

"International Star Award for Quality 2009" under Gold category from Business Initiatives Directions, SPAIN. The award will be given to us during 34th International Star for Quality Convention to be held at Geneva during Oct 25-26, 2009.

Sterlite Manufacturing locations and its Data Center achieves ISO 27001 Certification.

2008

CII, Energy Efficient Unit, 2008

Government of India, National level award for Export performance for 2006-07

CII - Water Efficient Unit Award, Excellent Water Efficient unit, 2008

Indian National Suggestion Scheme Association- 10th National Suggestion Summit - I prize in Technical

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Ramkrishna Bajaj National Quality Award, Performance Excellence Trophy, 2008

Golden Peacock Award for the Environment Management

OPERATING AND CASH CYCLE

Operating cycle and cash cycle are two important components of working capital management. Together they determine the efficiency of a firm regarding working capital management.

OPERATING CYCLE

Operating cycle refers to the delay between the buying of raw materials and the receipt of cash from sales proceeds. In other words, operating cycle refers to the number of days taken for the conversion of cash to inventory through the conversion of accounts receivable to cash. It indicates towards the time period for which cash is engaged in inventory and accounts receivable. If an operating cycle is long, then there is lower accessibility to cash for satisfying liabilities for the short term.

Operating cycle takes into consideration the following elements: accounts payable, cash, accounts receivable, and inventory replacement.

Operating cycle is of two types:

Gross operating cycle

Net operating cycle

Gross Operating Cycle

GOC = RMCP+WICP+FCP+DCP

RMCP = RAW MATERIAL CONVERSION PERIOD

= AVERAGE STOCK OF RAW MAERIAL / RAW MATERIAL CONSUMPTION

WICP = WORK IN PROGRESS CONVERSION PERIOD

=AVERAGE STOCK OF WORK IN PROGRESS / TOTAL PRODUCTION COST

FCP = FINISHED GOODS CONVERSION PERIOD

=AVERAGE STOCK OF FINISHED GOODS / TOTAL SALES

DCP = DEBTOR'S CONVERSION PERIOD

=AVERAGE ACCOUNTS RECEIVABLE / NET CREDIT SALES

NET OPERATING CYCLE(NOC)

NOC = GOC - CCP

CCP = CREDITOR'S CONVERSION PERIOD

OR PDP = PAYABLE DERERAL PERIOD

=AVERAGE PAYABLE / NET CREDIT PURCHASES

CASH CYCLE

Cash cycle is also termed as net operating cycle, asset conversion cycle, working capital cycle or cash conversion cycle.

Cash cycle is implemented in the financial assessment of a commercial enterprise. The more the figure is increased, the higher is the period for which the cash of a commercial entity is engaged in commercial activities and is inaccessible for other functions, for instance investments. The cash cycle is interpreted as the number of days between the payment for inputs and getting cash by sales of commodities manufactured from that input.

The fundamental formula that is applied for the calculation of cash conversion cycle is as follows:

Cash cycle = (Average Stockholding Period) + (Average Receivables Processing Period) - (Average Payables Processing Period)

Here

Average Receivables Processing Period (in days) = Accounts Receivable/Average Daily Credit Sales

Average Stockholding Period (in days) = Closing Stock/Average Daily Purchases

Average Payable Processing Period (in days) = Accounts Payable/Average Daily Credit Purchases

A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments.

There is always a probability that a commercial enterprise can face negative cash conversion cycle, in which case they are getting payments from the clients before any payment is made to the suppliers. Instances of such business entities are commonly those companies, which apply JIT or Just in Time techniques. The more the manufacturing procedure is extended, the higher the amount of cash should be kept engaged in inventories by the company. Likewise, the more time is taken for the clients for the purpose of bill payment, the more is the accounts receivable amount. From another viewpoint, if a company is able to detain the payment for its internal inputs, it can decrease the amount of money required. Put differently, the net working capital is diminished by accounts payable.

ANALYSIS

Working Capital refers to that of firm's capital which is required for financing the short term or current assets such as cash, debtors, inventory. Funds, thus, invested in current assets keep revolving fast and are being constantly covered into cash and this flows out again in exchange for other current assets. The average length of time between when a company purchases items for inventory and when it receives payment for sale of the items. A long operating cycle tends to harm profitability by increasing borrowing requirements and interest expense.

In case of STERLITE INDUSTRIES, the Gross Operating Cycle was high in 2005 i.e. it was 72 days but in 2006 72 days than 79 in 2007 and increase to 81 days in 2008 but finally in 2009 it is 48 days which is quite low from initially in 2005. This is positive sign as the length of Operating Cycle is decreasing and it is finally reduced to 48 days that means the money is collected easily from debtors within the period of 48 days.

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For CASH CYCLE also the length is reduced in 2009 to 24 days from 62 days in 2008, 56 days in 2007, 37 days in 2006 and 36 days in 2005. The average time taken by a STERLITE INDUSTRIES in converting merchandise or raw material back into cash starts declining in 2009 which is good indicator and it means that it is following good credit policy. A short cash cycle reflects sound management of working capital. On the other hand, a long cash cycle denotes that capital is occupied when the commercial entity is expecting its clients to make payments.

BIBLIOGRAPHY & REFERENCE

http://www.moneycontrol.com/company-article/sterliteindustriesindia/news/SII

http://www.sterlite-industries.com/about_us/Company_Overview.aspx

www.business-standard.com/stockpage/stock_details.php?bs

http://www.business-standard.com/pdf/sterlite%20industries-ic-070809.pdf

http://finance.mapsofworld.com/corporate-finance/management/operating-cycle-and-cash-cycle.html

http://financial-dictionary.thefreedictionary.com/operating+cycle

READING:

Pandey I.M., Financial Management; Vikas Publishing House Pvt. Ltd.

Chandra Prasanna; Financial Management: Theory and Practice; Tata Mc

Graw Hill.