CASE 3: KOTA FIBRES, LTD. Kota Fibres, Ltd.

is an India-based supplier of synthetic fiber yarns used in making traditional saris. Kota showed consistent profitability, posting 18% sales growth and net profit of Rs 2.6 million in 2000. It should be noted that the highly competitive synthetic-textile market is expected to reach 15% industry growth per year. Kota Fibres Ltds uses an aggressive approach to debt structure, regularly opting to use an All-India Bank & Trust Companys line of credit for its expenses. However, due to low cash conversion, the company breached the line of credits term for cleanup and its extensions, removing the ability of the company to take loans from the said bank. Mrs. Pundir, Kotas managing director and principal owner, needs to find ways to increase the companys cash conversion to cleanup the debt. Various strategies1 are presented in a stack of memos located at Mrs. Pundirs table. Each memo can improve a certain financial aspect of the company. In addition, Mrs. Pundir can opt to decrease the huge dividends paid to stockholders. This steps, plus controlling key financial ratios, will clean up the debt by end of 2001. Kota aims to increase liquidity by speeding up the cash conversion cycle. Its current objective is to cleanup outstanding debt by the end of 2001. However, the risks of each strategy should be considered, particularly its effect on the companys goodwill which is severely important on competitive industries. With this, we used Mr. Mehtas forecasted cash budget to consolidate the effect of each strategy to the net outstanding debt of the company.2 After this, we computed for the optimum cut of dividends to be paid.3 We also analyzed operating expense and its effect on outstanding debt. 4 Mr. Mehtas forecasted cash budget shows outstanding debt at 3,463,701 and the company has a current cash ratio of 0.17, a bad figure to present to the bank. After analyzing the impact of implementing the suggestions on the outstanding debt, we found that the second strategy is the only proposal that should be implemented. The strategy reduces outstanding debt at year-end by almost 700,000 rupees without much risk. The first proposal of improving credit period for a new customer will increase the forecasted net profit but will result to more debts. Going back to the companys objectives, the proposal is rejected. The third proposal is also rejected because although it has the positive fiscal impact on debt payment, we deem the just-in-time strategy as risky and in realization of risk, tarnish the companys goodwill. The fourth proposal of implementing a scheme of level production should not be approved because it entails additional labor and holding costs. In addition to using the second proposal, we recommend controlled reduction of operating expenses from 6% to 5% of sales and dividend decrease to a lump sum year-end value of 240,896. Implementing our recommendations will result to a total loan clean up at year-end 2001.5
1

2,3,4,5

See Table 1 See Appendix

TABLE 1 Strategy 1 Strategy 2 Strategy 3 Strategy 4

Sales Field Manager: Improve credit terms from n/40 to n/80. Transportation Manager: Reduce raw material inventory from 60 days to 30 Purchasing Agent: 35% inventory from Hibachi Company to use just-in-time basis. Reduce days inventory from 30 to 2-3 Operations Management: Stabilize work force