ANALYSIS OF KOTA

FIBRES CASE STUDY

Rishabh Agarwal 330

Ankit Waghrecha 328
Tushar jain 126
Rakesh Verma 329
Vatsalam 126
Akshay Vohra 125
 To start with

 Kota fibres Ltd. Was founded in 1962 to produce nylon

fibres at its only plant in Kota.

 Ms. Pundir is the managing director and principle

owner of the firm.

 It supplies synthetic fibre yarns used to weave

colorful cloths for making saris.
 Eye-catching problem

Kota fibres had a line of credit at the All-India bank where

it also maintained its cash balances.

Line of credit-An arrangement in which a bank or vendor

extends a specified amount of unsecured credit to a
specified borrower for a specified time period also called
credit line.

Main problem faced by the company was the loan

repayments to be done to All-India Bank, which was
already delayed because of Ms Pundir’s reassurances.
 Increased loans

 Kota fibres was continually taking loans from the All-

India Bank in spite of the proper sales.

 Gross sales was projected to reach 90.9 million in

year that ended 31st Dec,2001.

 Gross sales is the total invoice value of sales before

deducting customer’s discounts and allowances.
Varying financial requirements

 Kota fibres had a peak season around late summers

when merchants start producing saris for the
upcoming festival “Diwali”.

 Due to which financial requirements varied across the

year.
Key Determinants of Kota`s
Borrowing Needs
 Key Determinants of Kota’s
Borrowing Needs

 Company Background
Produces Nylon Fiber by using New Technology and
Domestic Raw Material. Its Yarn is used by the Local
Textile Weavers which in turn are manufacturing
Cloths for making Sari.

 Synthetic Textile Market

Market is stable with seasonal fluctuations and unit
growth in the industry was expected to 15% per year.
 Key Determinants of Kota’s
Borrowing Needs

 Supply Chain System:

 Consumers purchase Sari from Cloth Merchants, which may

give credit for supporting the Sales.
 Cloth Merchant maintains Low level of inventory and built
stocks in advance only during the peak seasons.
 Textile Mills grants credits to the Merchants.
 Yarn Manufacturers have to supply the material on credit for
capturing the market share.
 Little or No Credit is given to the Yarn Manufacturers by their
Suppliers.
 Key Determinants of Kota’s
Borrowing Needs.

 Production and Distribution System

 Thin profit margins has prompted her to operate plant

at full capacity for two months and at modest level for
rest of the year.
 Has two warehouses to meet the customers demand.
 Carrying finished goods from the warehouse to the
customers was a difficult task because of poor roads
and unavoidable calamities in midst of long distances
like accidents.
 Key Determinants of Kota’s
Borrowing Needs.

 Conclusion from the Above Slides

 Supply of orders delayed ~ Kota Fiber receivables get

delayed which means the firm runs out of cash for
proceeding with the downstream activity of the
company.
 Key Determinants of Kota’s
Borrowing Needs.

 Company’s performance
 It’s a profitable firm.
 Sales grew at 18% for the year 2000.
 Gross Sales Projected to reach 90.9 million in2001.
 Net Profits reached 2.6 million in 2000.

 Being a profitable fund the company has always given high

dividends to its Equity Holders. Pundir’s family believed
that funds left in the firm were at greater risk than if the
fund is returned to the equity holders.
Key Determinants of Kota’s Borrowing Needs.
1999 2000 2001
actual in actual in rs) forecast in rs)

Gross Sales 64487358 75867480 90900108

Excise Tax 9673104 11380122 13635016
Net Sales 954814254 64487358 77265092
Cost of goods 44496277 53865911 66993380
Gross profits 10317978 10621447 1027172
Operating 3497305 4828721 5454006
expenses
Depreciation 769103 908608 1073731
Interest 910048 1240066 1835620
expenses
Profit before 5141521 3644052 1908355
tax
Income tax 1542456 1093216 572506
Net profit 3599065 2550837 1335848
 Key Determinants of Kota’s
Borrowing Needs.

 While making a reassessment Pundir proposed of

paying a dividend of 500000 quarterly to its 11
members.
 Which implies distribution of 20,00,000 .
 Income statement of 2000 in previous slide has
shown that a net profit is of 25,50,837.
 Which means cash left for the year 2001 would be
25,50,837 - 20,00,000=5,50,837 .
 Key Determinants of Kota’s
Borrowing Needs.

 So Cash left with the firm= 5,50,837 .

 Cash to be maintained at the start of the year =
7,50,000.
 A lone of minimum 1,99,163 is required to operate
the fund at the start of the financial year 2001.
ANALYSING KEY WORKING
CAPITAL RATIOS
 Cash Cycle

 Cash Cycle is basically the duration of time a firm takes

to convert the activities which require cash, back into
cash returns.
 Cash Cycle is the more appropriate way to assess the
liquidity position of a company and also for comparing
two or more companies in this respect. This is because
this takes into account the investment quality of the
two critical assets i.e Receivables and Inventory. This
tells us the time it takes to convert these two assets
into cash, which is what creates real liquidity.
 
Direct result of Kota’s cash cycle

 Suppliers of raw material provide little to no credit. 

 Kota has to borrow to purchase inputs in advance. 
 Once the raw material is purchased it is processed into
fiber yarn and then sold to textile mills. (The mills will
purchase from Kota only if it is willing to sell the yarn on
credit.)
 The textile mills then sells the finished cloth to merchants
who then sells to consumers.
 In sum, Kota is forced to purchase raw materials in cash,
and then float its finished product long enough for
textile mills to turn the yarn into material and then sold
to the final consumer.
 Kota is forced to finance the entire production.
 Inventory Turnover Ratio

Cost of Goods Sold: 53,865,911

Inventories: 1,249,185
 
IT = CFGS / Inventories
    = 53,865,911 / 1,249,185
    = 43.12
 
 IT in Days = 365 / 43.12
                  = 8.4
            ITD = 9 days
 Receivables Turnover Ratio

Net Sales: 64,487,385

Accounts Receivable: 2,672,729
 
RT = Net Sales / Accounts Receivable
     = 64,487,385 / 2,672,729
    = 24.12
 
 RT in Days = 365 / 24.12
                   = 15.1
           RTD = 16 days
 Payable Turnover Ratio

Total Supplier Purchases: 42,419,371

Accounts Payable: 759,535
 
PT = TSP / Accounts Payable
     = 42,419,371 / 759,535
     = 55.85
 
 PT in Days = 365 / 55.85
                   = 6
           PTD = 6 days
 Cash Cycle

Operating Cycle = ITD + RTD

                          = 9 +16
                          = 25 days
 
Cash Cycle = Operating Cycle - PTD
                   = 25 - 6
                   = 19 days
 Results

• Cash cycle is 19 days.

 
• Payable Turnover is 7 days.
 
• Maintains raw material inventory of nearly 60 days.
 
• Seasonal Business.

• Schedule of Cash Receipts and Disbursements for 2001 (Exhibit 9) in

the first 4 months, the purchase of Kota Fibers is bigger than sales.
Forecasting
 •A financial forecast is normally an estimate of future
financial outcomes for a company or country (for futures
and currency markets). Using historical internal
accounting and sales data, in addition to external market
and economic indicators

•Unlike a financial plan or a budget a financial forecast

doesn't have to be used as a planning document. Outside
analysts can use a financial forecast to estimate a
company's success in the coming year.
Forecasting is used to answer important questions, such as:

How much profit will the business make?

How much demand will there be for a product or service?

How much will it cost to produce the product or offer the

service?

How much money will the company need to borrow?

When and how will borrowed funds be repaid?

 Properties of Forecasting

 The principal driver of the forecasting process is generally

the sales forecast.
 The forecasting approach presented in this section is the
Percentage of Sales method.
 Since forecasting can be inaccurate due to uncertainty, we
should consider developing several forecast under
different scenarios.
 Longer the planning period, the more inaccurate the
forecast.
 Forecasting of large inter-related items is more accurate
than forecasting a specific itemized amount.
 Importance of Forecasting

 Enables management to change operations at the

right time in order to reap the greatest benefit
 Developing new products or new product lines.
 Prevents the company from spending time and
money developing, manufacturing, and marketing a
product that will fail.
 Forecasting is also used by outsiders to value
companies and their securities.
Forecasting Financial
Statements
Why not do away with Budgets?

 Budget – Projection of future cash receipts and cash

disbursements of firm over various intervals of time.
 Budget – prospective cash positions v/s
 Forecast statements – expected estimates of all
assets, liabilities and PnL items.
 Forecast statement is before the budget.
 Tax Estimates from forecast income statement used
when preparing the cash budget.
 Forecast Income Statement

 Summary of a firm`s expected revenues and expenses

over a future period
 Combination of :-
 Cost of goods sold
 Selling general and administrative expenses
 Other income and expenses, depreciation
 Net income after taxes
 Forecast Balance Sheet

 Forecasting Assets
 Receivable Balance = Projected sales/Receivable Turnover ratio.
 Estimated investments  production schedule sales forecast
 Inventory Forecast
 Net PP&E = Planned expenditures + Net fixed assets – fixed assets sold -
depreciation
 Forecasting Liabilities
 Accounts Payable = Projected purchases – total projected cash payments for
purchases
 Accrued Wages and Expense based on production schedule
 Accrued income taxes = taxes due on forecasted income – actual tax paid
 Shareholders Equity = Equity( 6 months before) + profits after taxes (during
that period) – amount of dividends paid.
 Cash and Bank Loans
Alternate Approach To Forecasting

 Percentage of sales method

 Forecasts balance sheet and PnL by assuming that most
accounts maintain a fixed amount of sales
 More Flexible than traditional method
Percentage Of Sales Process
 Conclusion and
Recommendations
• Ms. Pundir is faced with resolving a surprising cash shortage
immediately. As her management style is extremely delegative, it is
important that she analyzes Kota Fibres’ financial situation before
making any decisions.

• By observation Ms. Pundir weighs her focus on shareholder profits

more so than the company’s liquidity and forecast for the future.

• Overall, Kota Fibres, Ltd. is doing a good job at managing their liquidity,
although the projection does show a slight decline in this area. This
means they could have potential issues with paying their bills on time
and converting their assets to cash if they follow the 2001 projection.
• In the area of Asset turnover and AR/AP, Kota Fibre is operating
at an acceptable level across the board. However, one red-flag is
the extended credit term of 80 days net requested by
Pondicherry Textiles. This would reduce the amount of cash on
hand during the year and increase their liabilities due to the 80
day credit term.

• In this circumstance, Kota Fibres should not accept this memo

as it will have an unfavourable effect on the business. Having less
cash on hand, tied up in receivables, will not allow Kota Fibres to
be able to pay off the All-India bank before December.
 the two proposals from the Transportation Manager and
the Purchasing Agent should be approved. A reduction in
raw material inventory and finished goods inventory on
hand will result in less inventory being accounted for in the
financial statements and increase the amount of overall
liquidity since Inventory is the least liquid asset.
 Kota Fibres must also recognize the contributing factor of
the shortage of cash on hand.
 This is due to the firm’s inefficiency to use their assets to
generate sales. Kota Fibres should boost this number by
increasing their amount of total assets.
 Their Debt-to-equity standing reflects another sign of how
they can increase their cash on hand. The projection for
2001 addresses this area well, and should be pursued.
 Kota Fibre will need to rethink its strategy to generate a
profit using the 2001 projection. Across the board, they will
be facing a decrease in profitability if they execute this
plan. They will need to improve their operating efficiencies
and levels of indebtedness to increase their bottom line,
ultimately resulting in their ability to make their creditors
and shareholders happy.
 It is crucial that shareholders are informed on the
recommended actions. This may allow for a different
approach to business rather than Ms. Pundir’s sole
objective of maximizing shareholder wealth.
 Understanding the seriousness of the financial situation
Kota Fibres is in with regards to paying their bills on time
and future forecasts, ethics and responsibility may also
come forward as shareholders should be willing to reinvest
profits in a company that will benefit them in the long run.