Kota Fibres Ltd.
KOTA FIBRES LTD
CASE ANALYSIS
Submitted by:
1. Ankan Mitra MP 13012
2. Shubhayu Sanyal MP 13056
3. V Satish MP 13066
4. Jasbir Singh MP13027
5. Kunal Ranjan MP13032
Case Analysis
Page 1
Kota Fibres Ltd.
BACKGROUND
Kota Fibres Ltd is engaged in yarn production in Kota Town. Textile mills use the yarn to
make traditional dresses especially saris for women in India. Kota Fibres has been in
existence since 1962 and has over the years grown at an annual growth rate of 15%.
In January 2001, the Managing Director of the company Ms. Pundir realized that the
company has been hit by a cash shortage. The companys liquidity problems had a
number of negative implications on its operations. Delivery of customer orders had to be
postponed as it was not in a position to pay excise duty in cash, before the loaded trucks
could leave the company premises. In addition, its Banker, the All-India Bank had
become wary of the companys financial health owing to the high frequency of overdraft
requests. Given this background, the banks lending officer demanded a financial
forecast in support of its strategy going forward before he could advance further loans to
the company. It wanted a satisfactory explanation before it could lend further.
Rs Lakhs
The firm used new technology and domestic raw material and had a loyal and steady
franchise of small, local textile weavers. The demand for synthetic textiles was stable
and showed year on year growth however the demand for the finished products was
seasonal and peaked during the festival seasons like Diwali. Thus demand for Kota
Fibres product peaked during May-July period as it was an upstream supplier for the
finished product. This is supported by their sales pattern in 2000 actual and 2001
forecast.
200
180
160
140
120
100
80
60
40
20
0
Monthly Sales Trend
2000 A
2001 F
Source: Exhibit 1 on Summary of monthly sales
Case Analysis
Page 2
Kota Fibres Ltd.
Thin profit margins forced Ms. Pundir to adopt a chase policy thus avoiding
overproduction and overstocking as Kota Fibres could not afford working capital being
blocked in high inventory being carried through the slack seasons. Thus they would
produce as much as is the demand and as and when such demand rise which is
generally during the May-July period as indicated in the monthly sales information given
above.
FINANCIAL PERFORMANCE
The business and financial performance in the textile industry in India is impacted by the
following factors:
1. The festive season
2. The cut-throat competition among small and fragmented players in the industry
3. Supply chain risks forcing companies to maintain high input and output stocks
resulting in huge inventory carrying cost
4. Financiers in the industry: The yarn manufacturers like Kota Fibres are typically
the financiers in the industry since they are the most upstream in the chain
In this perspective, we now attempt to analyse the performance of Kota Fibres.
It is also important to note that though the top line for the company had grown at the rate
of ~15% Y-o-Y, the margin squeeze has been pretty alarming as indicated by the
financial numbers of the company.
Particulars
Gross Sales
Excise Duty
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Interest Expenses
Profit before Tax
Income Tax
Profit after Tax
1999 A
118%
18%
100%
81%
19%
6%
1%
2%
9%
3%
7%
2000 A
118%
18%
100%
84%
16%
7%
1%
2%
6%
2%
4%
2001 F
118%
18%
100%
87%
13%
7%
1%
2%
2%
1%
2%
Source: Exhibit 2 Ratio to Net Sales
Case Analysis
Page 3
Kota Fibres Ltd.
The PAT has fallen from 7% of net sales to 2% of net sales (forecast) as a result of
increase in raw material cost from 81% to 87% (forecast) and increase in the operating
expenses by 1%.
Trend on various heads is as follows:
Particulars
Gross Sales
Excise Duty
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Depreciation
Interest Expenses
Profit before Tax
Income Tax
Profit after Tax
1999 A
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2000 A
118%
118%
118%
121%
103%
138%
118%
136%
71%
71%
71%
2001 F
120%
120%
120%
124%
97%
113%
118%
148%
52%
52%
52%
Source: Exhibit 2 Rate of Growth on various heads over years
The sales has grown at the rate of 18% and 20% over the two comparable periods while
the raw material cost has increased at the rate of 21% and 24% over the same period.
The operating expenses during the same period grew at 38% and 13% respectively.
This only goes to prove that either the company does not focus on cost control aspects
or has little control over it given the fact that the expenditure has spiraled up over the
years.
FINANCIAL POSITION
Particulars
Cash
Accounts Receivable
Inventories
Total Current Assets
Gross PP&E
Accumulated Deprn
Net PP&E
Total Assets
Accounts Payable
Bank Overdraft
Accrued Taxes
Case Analysis
2000 A
6%
20%
9%
35%
76%
11%
65%
100%
2001 F
5%
24%
14%
43%
74%
16%
57%
100%
6%
5%
0%
7%
22%
-1%
Page 4
Kota Fibres Ltd.
Total Current Liabilities
Owner's Equity
Total Liabilities & Equity
11%
89%
100%
28%
72%
100%
Source: Exhibit 3 Historical and Forecast Balance Sheets
Though the company is profitable it has working capital problem primarily because of the
increasing trend in Debtors (20% in 2000 to 24% in 2001) and money stuck in inventory
(9% in 2000 to 14% in 2001). The dampener is the fact that the assets are largely
financed by Bank overdraft. Until Ms. Pundir finds some substantive way of solving this
working capital crisis, short term funds to finance a structural working capital problem will
not result in any benefit to the company.
BUSINESS EXPECTATIONS
The Pundir family thought that excess funds left in the firm were at a greater risk than if
the funds were returned to the shareholder. Thus, Kota Fibres was a regular dividend
paying company and expected to pay Rs 5 lakh to the 11 member strong Pundir family
every quarter.
This seems to be a fallacy. At one end the business in growing at a fair pace with 15%
Y-o-Y growth rate. During growth phase, the requirement for working capital would
increase to finance and sustain business requirements of the firm. But instead of
ploughing back profits to meet business requirements, the owners think it fit to reward
themselves with hefty dividends.
ANALYSIS AND PROBABLE OUTCOMES
Cash conversion cycle (CCC) of Kota Fibres is as follows:
Particulars
Days
Outstanding
Inventory
60
Accounts Receivable
Accounts Payable
48
30
Total Cash Cycle
78
Case Analysis
Basis
Purchase represented avg. 55%
of the value of sales expected to
be made 2 months later
(40% x 30 days + 60% x 60 days)
As per the model
Current Assets Current
Liabilities
Page 5
Kota Fibres Ltd.
Though it seems that such a cash cycle is typically the norm in the textile industry,
however, this is proving to be a menace for Kota Fibres Ltd. They will have to adopt a
strategy to crush this cash cycle to improve its liquidity.
To improve liquidity, working capital position, the firm could look at some or all of the
following strategies:
Zero dividend payout for some time: though this would be an unpopular move
among the family members, this would exhibit seriousness in Ms Pundirs effort
to improve liquidity.
Slow down rate of growth of business: The firm may decide not to grow for a
year or two to improve or rectify the working capital issues of the firm. Once this
structural issue of liquidity is addressed, it may thereafter foray to grow at the
15%-20% rate of growth.
Cost control and cost reduction measures: The rate of growth in input
material cost and the operating expenses is higher than the rate of growth in the
revenues. Given this fact, the firm should focus on cost control and cost
reduction measures without impacting the quality of its finished products. A
sustained effort in this direction is likely to yield results over time.
In addition, Ms Pundir may also decide to act as below on the various proposals waiting
for her acceptance:
1. Pondicherry Textiles (PT) Proposal: At an order load of INR 6 Million, PT sales
would represent ~7% of overall Kota Fibres sales which means they would be
one of its larger customers. However, the credit term of 80 days will prove
disastrous for Kota Fibres. The average accounts receivable at ~48 days itself is
difficult to manage. Additional debtor days would worsen the situation. Mr A
Bajpai should try and negotiate not greater than 48 days of credit else Kota
Fibres should forego this customer for better times in the future.
2. Inventory reduction proposal: Mr. R Sikhs proposal to reduce raw material
inventory from current 60 days to 30 days is more than welcome. This will reduce
the need to maintain 60 days stock at any point in time and will thus reduce the
cash cycle by 15 days(60 days x 50% (proportion of RM in overall inventory) x
50% reduction in duration of inventory carrying). This proposal should be
implemented immediately.
Case Analysis
Page 6
Kota Fibres Ltd.
3. Hibachi chemicals proposal: The JIT proposal is a blessing in disguise for
Kota, one which has come at the right time. The reduction in the carrying duration
from 60 days to 2-3 days is likely to bring down the inventory days outstanding by
atleast 5-10 days depending on its weight in the overall buy.
4. Level Production strategy: Though it is expected to help improve margins and
improve relaibility of the machines / equipments, the increase in wage bill and the
inventory carrying cost is likely to offset the benefits of higher margin and lower
set up cost and less frequent breakdowns. However, due to lack of data, nothing
can be concretely said. Thus, the assumption is that this strategy may not be
beneficial.
CONCLUSION
Highly profitable organizations have had to close down shop primarily because they
were not able to sort out their working capital problems. Thus, it is important for Kota
Fibres to sort out their liquidity issues as a priority if they intend to stay long in the
business and stay profitable. All or a combination of the above recommendations will
help Kota Fibres to move in that direction.
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Case Analysis
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