GMP – Tata Steel (2019-20)

Guna Fibres Ltd

Team Members
CGT19003: Anil Kumar Nayak
CGT19004: Animesh Kumar Singh
CGT19005: Ankit Bansal
CGT19009: Bhavani Shankar
1|Page GMP – Tata Steel (2019-20)

Contents
Introduction ........................................................................................................................................... 2
Key Financial Problems: ...................................................................................................................... 2
1. Credit Market............................................................................................................................ 2
2. Inventory – Level Annual Production Scheme....................................................................... 2
3. Problem with Loan Payment ................................................................................................... 3
4. High Dividend Payment............................................................................................................ 3
Analysis .................................................................................................................................................. 3
Summary and Conclusion .................................................................................................................... 4

Team Members:
Anil Kumar Nayak (CGT19003) | Animesh Kumar Singh (CGT19004)
Ankit Bansal (CGT19005) | Bhavani Shankar (CGT19009)
2|Page GMP – Tata Steel (2019-20)

Introduction
Guna Fibres is a nylon fabricating company located about 500 km south of New Delhi, India.
By using new technology and domestic raw materials, the firm had developed a steady
franchise among dozens of small, local textile weavers. It supplied synthetic fibre yarns used
to weave colourful cloths for making saris, the traditional women’s wear in India.

Guna had experienced consistent growth and profitability in the past. In 2011, sales had grown
at an impressive rate of 18%. Recent profits were INR25 million, down form INR36 million in
2010. Guna’s growth was expected to continue with gross sales reaching more than INR900
million in 2012. Despite of all these profits, the firm has a very low cashflow and it was heavily
dependent on bank.

Key Financial Problems:

1. Credit Market
The demand for synthetic textiles in India was stable, with year-to-year growth and predictable
seasonal fluctuation. The most important festival Diwali causes seasonal peak in the demand
for new saris, which in turn caused a seasonal peak in demand. A cloth merchant generally
sells these clothes to customers.

The competition among the producers of cloths is affected by price, service and credit period
to the merchants. Though the producers give credit to the merchants, they get very little or no
credit form their supplier which reduces cash flow to the firm.

2. Inventory – Level Annual Production Scheme

The cost of raw material for Guna’s yarn production is nearly 55% of gross sales. Currently
the firm is purchasing raw material for 2 months of production. The account receivable of the
firm had been running steadily at the rate of 48 days where as the account payables were paid
within 2 weeks. So, by adopting level annual production scheme, though the labour cost won’t
get affected much, the inventory cost will increase significantly.

The continuous production throughout the year will increase finished good inventory during
the off-season. As the account receivable days is 48 days, a huge working capital will be
required to maintain the operating cycle (Inventory turnover days + Receivable turnover days).

Team Members:
Anil Kumar Nayak (CGT19003) | Animesh Kumar Singh (CGT19004)
Ankit Bansal (CGT19005) | Bhavani Shankar (CGT19009)
3|Page GMP – Tata Steel (2019-20)

3. Problem with Loan Payment

Guna Fibres has a line of credit at All-India Bank & Trust Company to finance the purchases
necessary to carry through the spike in demand that occurs during festival season. The All-
India’s short-term interest rate was 14.5%. As per the terms, Guna Fibres must zero out the
balance on this line of credit in October each year. At the terminal of 2011, Guna Fibres found
themselves running a balance on their line of credit beyond October and was later denied any
more credit until the firm could show solvency/ reasonable financial plan to pay the balance by
end of 2012.

4. High Dividend Payment

Guna is family owned firm with 11 owners and was manged by Surbhi Kumar. Despite having
problem in cash-flow and having a line of credit beyond the repayment period, Kumar expected
to pay INR20 million (1.6x net profit) dividend to the 11 owners. This decision will further
weaken the financials of the firm.

Analysis
The forecasts done by Mr. Vikram Mallick, the bookkeeper does not alleviate the problem as
the firm will not be able to eliminate the bank loan for clean-up in the coming year. We have
done the analysis based on the proposal of transportation manager. Reduction in days
inventory outstanding will help in decreasing current assets outstanding and thus requirement
for loan. The dividend pay-out is also looking extraordinarily with total dividend pay-out
exceeding net earnings for the firm. We have taken most of the assumptions as taken by Mr
Mallick for the analysis. Dividend Pay-out is reduced to 2.5 million per quarter till the
condition of firm improves.

As per the proposal of transportation manager, no purchases are being done for the month of
January. This had following Impact on month-wise Inventory

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Purchases 0.0 24.5 48.4 76.4 96.7 89.7 47.2 27.7 24.5 19.4 15.2 18.7
Direct Costs 5.4 0.0 8.3 16.5 26.0 32.9 30.5 16.0 9.4 8.3 6.6 5.2
Cost of Goods Sold 19.3 21.3 32.8 64.9 102.3 129.6 120.2 63.2 37.1 32.8 26.0 20.4
Inventory 20.6 23.8 47.7 75.7 96.0 89.0 46.5 27.0 23.8 18.7 14.5 18.0

The decrease in inventory levels is leading to a reduction in Current Assets. This is being
adjusted to decrease current liabilities and thus notes payable. The forecasting predicts that
with the change in Inventory Policy and dividend pay-out policy, Guna Fibres will be able to

Team Members:
Anil Kumar Nayak (CGT19003) | Animesh Kumar Singh (CGT19004)
Ankit Bansal (CGT19005) | Bhavani Shankar (CGT19009)
4|Page GMP – Tata Steel (2019-20)

find a clean-up month next December, with maximum credit requirement going to 238
million.

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 2012
Gross Sales 26.2 28.9 44.5 88.0 138.9 175.9 163.2 85.8 50.3 44.5 35.3 27.7 909.0
Excise Taxes 3.9 4.3 6.7 13.2 20.8 26.4 24.5 12.9 7.5 6.7 5.3 4.2 136.3
Net Sales 22.2 24.6 37.8 74.8 118.0 149.5 138.7 72.9 42.8 37.8 30.0 23.5 772.6
Cost of Goods Sold 19.3 21.3 32.8 64.9 102.3 129.6 120.2 63.2 37.1 32.8 26.0 20.4 669.9
Gross Profit 2.96 3.27 5.03 9.95 15.69 19.87 18.44 9.69 5.69 5.03 3.99 3.13 102.72
Operating Expenses 4.54 4.54 4.54 4.54 4.54 4.54 4.54 4.54 4.54 4.54 4.54 4.54 54.54
Depreciation 0.84 0.84 0.87 0.87 0.87 0.90 0.90 0.90 0.93 0.93 0.93 0.96 10.74
Interest Expense 0.10 0.06 0.03 0.45 1.20 2.13 2.88 2.60 1.43 0.53 0.17 0.00 11.57
Profit Before Taxes -2.5 -2.2 -0.4 4.1 9.1 12.3 10.1 1.6 -1.2 -1.0 -1.7 -2.4 25.9
Income Taxes -0.8 -0.7 -0.1 1.2 2.7 3.7 3.0 0.5 -0.4 -0.3 -0.5 -0.7 7.8
Net Profit -1.8 -1.5 -0.3 2.9 6.4 8.6 7.1 1.2 -0.9 -0.7 -1.2 -1.7 18.1
Dividend 2.5 2.5 2.5 2.5

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12
Cash 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5 7.5
Accounts Receivable 27.7 32.9 50.1 103.0 180.0 247.5 257.0 171.9 90.1 62.9 50.3 37.1
Inventory 20.6 23.8 47.7 75.7 96.0 89.0 46.5 27.0 23.8 18.7 14.5 18.0
Total Current Assets 55.9 64.2 105.3 186.2 283.5 344.0 311.0 206.4 121.3 89.2 72.3 62.7
Gross Plant, Property, and Equip 101.0 101.0 104.5 104.5 104.5 108.0 108.0 108.0 111.5 111.5 111.5 115.0
Accumulated Depreciation 15.7 16.5 17.4 18.3 19.1 20.0 20.9 21.8 22.8 23.7 24.6 25.6
Net Plant, Property, and Equipment 85.3 84.4 87.1 86.2 85.3 87.9 87.0 86.1 88.7 87.8 86.8 89.4
Total Assets 141.1 148.6 192.4 272.4 368.8 431.9 398.0 292.5 210.0 176.9 159.2 152.0
Accounts Payable 0.0 12.2 24.2 38.2 48.4 44.9 23.6 13.8 12.2 9.7 7.6 9.4
Note Payable 4.9 2.3 37.1 99.0 176.2 238.2 215.4 118.0 44.0 14.4 0.4 -3.6
Accrued Taxes -1.7 -2.3 -2.4 -1.2 1.5 0.0 3.0 3.5 0.0 -0.3 -0.8 -1.5
Total Current Liabilities 3.2 12.2 58.8 135.9 226.0 283.0 242.0 135.4 56.2 23.8 7.2 4.3
Shareholders' Equity 137.9 136.4 133.6 136.4 142.8 148.9 156.0 157.1 153.8 153.1 151.9 147.8
Total Liabilities & Equity 141.1 148.6 192.4 272.4 368.8 431.9 398.0 292.5 210.0 176.9 159.2 152.0

Summary and Conclusion

There is a scope of improvement in working capital management for Guna Fibres. Considering
the projected Net earnings of 12 million for 2012, dividend pay-out of 20 million in very high.
The firm needs to alter the dividend policy to 50% of current practice till the condition of firm
improves. Also, for better management of working capital, the proposal of transportation
manager of reducing the inventory days from current 60 days to 30 days seems favorable. This
could help the firm in providing the cleanup month to bank as per terms of credit line
agreement. Considering the credit terms of suppliers of raw material, the firm also needs to
relook its strategy of credit to customers.

Team Members:
Anil Kumar Nayak (CGT19003) | Animesh Kumar Singh (CGT19004)
Ankit Bansal (CGT19005) | Bhavani Shankar (CGT19009)