COMFORT WOOL LTD∗

Mr. KLN Gupta General Manger (Finance) of Comfort wool Ltd is getting ready for a
meeting with his main banker to discuss on working capital facilities for the newly
promoted wool textiles manufacturing company (Exhibit-1). A few weeks back the
company has organised a road show at a premier hotel which was attended by bankers,
investors and other interested parties. Thereafter, Mr. Gupta has made a rough estimate of
finance requirements for this project, briefed up other developments and invited State
bank of Hindustan as main banker of the company (Exhibit -2).

The Project
Comfort wool Ltd. (CWL) has been promoted by Uniwool Group controlled by two non-
resident Indians (Shri N. R. Gupta and his nephew Shri M. L. Gupta) and assisted by their
sons with an intention to set up a new 100% export oriented weaving unit and a separate
fabric finishing unit for manufacture of all woolen/worsted and silk blended fabrics. The
factory will be located at Raipur in Madhya Pradesh and the installed capacity will be 54
Sulzer Looms with production and processing facilities of 40 Lakhs meters per annum.
The cost of the project has been estimated at Rs.9360Lakhs, which will be financed by
equity share capital of Rs. 3580 Lakhs, partly convertible debentures of Rs. 3450 Lakhs,
Rupee term loan of Rs. 2300 Lakhs and state subsidy of Rs. 30 Lakhs. Rupee term loan
of Rs. 2000 Lakhs (at the rate of 13% p.a) has since been sanctioned by the IFI a leading
financial institution, the company proposes to open the public issue in 2003-04 for Rs.
1050 Lakhs. The term loan is for a period of eight years and the repayment starts from
third year onwards. Remaining Rs. 2400 Lakhs of the total proposed capital will be
contributed by the promoters. The company had discussions with Unimachine Inc. who
are agreed to supply the machinery and the cost of machinery in Indian rupees would be
Rs.50Crore. The depreciation on this is estimated as Rs.1500 Lakhs per year.

The company has placed orders for the machinery and same are expected to arrive in the
last week of December 2002. As the necessary infrastructure is in existence, the
installation will be completed by January 2003 and trial production or commercial
production is expected to commence by February 2003. The plant is estimated to work at
60% capacity in the first year, 90% capacity in the second year and at 95% capacity from
third year onwards.

The proposed site for weaving unit is at a distance of about 12 kilometers from Raipur
town (Urla Growth Centre, an industrial area), which is well connected both by road and
rail and is on the Bombay-Nagpur and Calcutta highway. CWL has acquired 10.6 acres
of land, of which 7.4 acres has been acquired from private parties and the balance from
Madhya Pradesh Audyogik Kendra Vikas Nigam Ltd. (MPAKVN). The soil at the site is
of black cotton type (up to depth of 1.5 meters) and soft murrum (clay shade) below 1.5
meters level and having a load bearing capacity of about 15 tones per sq. meter.

∗
This case is prepared by Dr. M.Jayadev, Faculty, IIM Lucknow for the purpose of class room discussion
dated November 3, 2003

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The finishing unit will be located within a vicinity of about 8 kilometers from the
weaving unit. Considering the fact that the finishing unit will generate effluents which
will be discharged after necessary treatment, the unit is proposed to be located at a
separate location having the required facility for effluent disposal. CWL will install an
‘effluent treatment plant’ to treat the process-house discharge. The company is in the
process of acquiring necessary approvals from State Pollution Control Board in regard to
the adequacy of the effluent treatment and disposal arrangements. Weaving unit will not
generate any harmful effluents.

The fabrics will be woven on Sulzer Projectile Single Width Looms and will be
processed on the State-of-the-Art imported processing/finishing equipments. The
selection of the plant and machinery has been made in consultation with SMPS Engineers
& Consultants Private Ltd., Ahmedabad, who has been appointed as consultants by CWL
for the proposed project. Shri K. Kanooja, chief of SMPS and a diploma holder in
woolen and worsted cloth manufacturing from U.K. with earlier experience in Reliance
Worsted Spinning Plant and Dig Vijay Woolen Mills, will be assisting in the
implementation and commissioning of the CWL’s project till establishment of the
optimum quality standards acceptable to the international market.

Worsted fabrics are made of worsted yarn and are mainly used for making dress materials
both for men and women. Worsted fabrics have the inherent properties of warmness,
maintainability and luster. The worsted fabrics have a unique property of warmness and
therefore, there is no real threat from substitutes in its segment. The demand for the
fabrics is highly differentiated on the basis of consumer segments and their geographical
location. Out of the total world imports Hong Kong, Germany, Japan, USA, France,
Canada, UK, and Italy occupies more than 60%. The worsted suiting materials are
normally made from pure worsted yarn and are also blended with polyester, viscose and
silk according to the requirements. In sub-tropical regions, the material is used in pure
form. Majority of the world production is consumed by the people of sub-tropical
regions like Europe, America and Australia. Being an EOU the company is in the
process of finalizing marketing tie-up with international buyers for the entire production.

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 Exhibit- 1

State Bank of Hindustan 27 December 2002

Corporate Accounts Group
Nariman Point
Mumbai-400 021

Mr. KLN Gupta

General Manager (Finance)
Comfort wool Ltd
Bandra-Kurla Complex
Mumbai

Dear Sri Gupta,

We are pleased to receive your invitation asking us to be the main bankers for your
company. We are happy to provide total financial solutions to your company. Based on the
project details and your letter dated 10 December 2002 we have made a rough estimate of
your working capital requirements. You are most welcome to visit our office and meet the
credit team to finalize the working capital requirements.

Thanking You,

Yours Sincerely,

MRS Rao
Chief Manager

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 Exhibit -2
Comfort wool Ltd
Damani House
Bandra-Kurla Complex
Mumbai

10 December 2002
KLN Gupta
General Manager

The General Manager

Corporate Accounts Group
State Bank of Hindustan
Mumbai

Dear Sir,

We must thank you for your gracious presence on the occasion of our project presentation
made on 10 November 2002 at Hotel Sea Princess. Your interest in our project has been
great encouragement for us and we request you to act as main bankers for our project in
extending various fund and non-fund based facilities. It would be our pleasure to see you
as our consortium leader in providing the entire financial solutions to this prospective
project. For the past one month we have been working on operational estimates of the
project. We wish to share some improvements in this regard with you.
We propose to export 50% of its products in grey form and the balance will be exported
in the finishing form. The sale price per meter of Grey fabric is likely to be $16 per
meter, where as the finished form may be salable at $18 per meter. On a conservative
basis we assume that the exchange rate of one US dollar is Rs.48.00 and we strongly
subscribe to the view that the rupee is likely to depreciate by 6% per annum. We are
afraid of currency price volatility. Is there any financial mechanism to protect our cash
flows?
We have entered a contract with ‘Key note’ a leading advertising agency to advertise and
market the product. This contract period is five years and the amount per annum is Rs.
70Lakhs. In addition to this other variable selling expenses are estimated as Rs.22.00 per
meter.
We propose to import the required woolen and blended yarn and we have well
established channels for procurement and hence do not anticipate any difficulty in
procuring the required quantity of quality worsted yarn for the proposed unit. We are
seeking your help in financing these imports. Two types of raw materials are required for
these fabrics. It is estimated that, 0.32 meters of A48 quality of yarn and 0.26 meters of
A72 quality yarn is required to manufacture one meter of fabric. Currently these raw

4
materials are available at AUD 31.35 and AUD 54.26 respectively. The exchange rate of
one Australian Dollar is assumed as Rs 27.25. We wish to import raw materials on sight
L/C basis which may take 3 months period; the payments will be made on receipt of the
relative bills, whereas the materials will reach the factory around 15 days thereafter. We
expect the bankers to factor this also in estimation of working capital requirements. In
addition to this indigenous raw material required is estimated as Rs.185.00 Lakhs at
100% capacity. Lead time is approximately 55 days.
The other chemicals required are available in the domestic market at Rs. 4.00 per meter
and the prices are likely to grow at 8 per cent per annum. The other manufacturing
expenses are estimated as Rs.300 Lakhs at 100% capacity. The lead time here is two
months.
The requirement of power (maximum demand) for the proposed weaving and finishing
units has been estimated at approximately 850 KVA and 400 KVA respectively. A
proposal has been made to MP State Electricity Board. The current tariff rate is Rs. 3.00
per unit. The board is asking for a bank guarantee of Rs. 150 Lakhs for installation of
transformers and other infrastructure.
Need less to say that, we also propose to acquire 2 D.G. Set of 860 KVA (SKODA –
imported) and 500 KVA (Kirloskar) capacities respectively for its weaving unit and
finishing unit to meet any eventualities arising out of power cuts.
The daily requirement of water for the weaving unit (4.25 Lakh liters per day) for air-
conditioning and humidification etc. and for the finishing unit (3.75 Lakh liters per day)
for boiler and wet-processing etc., estimated to be about 8 Lakh liters per day is proposed
to be met by two bore-wells to be located at the respective sites. No difficulty has been
envisaged by us for meeting its water requirement.
We are also planning to acquire an oil-fired tube boiler of 1.5 tones per hour capacity
from Thermax to meet its estimated steam requirement for its finishing unit. Process of
conversion of raw material is very fast the unfinished goods are not held more than 15
days.
The total man-power requirement per day has been estimated at 179 and 111 for the
weaving unit and the finishing unit respectively (including relievers for 7 days working).
The requisite labour force, which would initially be of I.T.I. trained cadre, is proposed to
be recruited locally or from nearby States and will be suitably trained. We do not foresee
any difficulty in recruiting the required man-power. Administrative and supervisory staff
has been estimated at 79 for weaving unit and 68 for finishing unit respectively. The
rates of remuneration have been considered at Rs. 4000 per month for labour and Rs.8000
per month for supervisory staff.
Other fixed administrative expenses are estimated as Rs.200 Lakhs at 100 % capacity and
the variable expenses are Rs. 2.00 per meter of fabric. We wish to maintain a minimum
cash of Rs.180 Lakhs to meet these administrative expenses.
Although our sales are mostly against export order we can not stop producing goods till
the order is placed. We wish to warehouse the finished goods for 45 days.
We wish to export the goods on DA basis and the usance period not exceeding 180 days.
All collections will be in USD only. This credit would be necessary to enable the
company to enter the international market, which is highly competitive. We believe that
realisation of payment advices may take not less than 15 days time. This may push the
realisation of sale proceeds to 6.5 months.

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As our operations are likely to begin from February 2003 we request you to assist us in
importing the raw material. Once again we request you to be main bankers for our
venture and suggest an effective financial solutions package.
If there is anything further to know please do call us or send a mail.

Looking for a fruitful relationship between our two Institutions.

Yours Sincerely,
KLN Gupta

Assignment Questions:
1. Estimate the working capital requirements of Comfort wool Ltd?
2. Suggest suitable instruments of working capital finance to meet both the import
and export requirements of the project?
3. What are the sources of risks identified and suggest suitable mechanisms to hedge
the risk? (This question is advanced level may be avoided in FM-I Classes)