FINANCE

KOTA FIBRES

Erryn M Paramytha
Joshua Marvel L G
Mila Mujaadilah
Ridho Riadi Akbar

29115016
29115314
29115053
29115093

YP 53 B

SCHOOL OF BUSINESS AND MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2016

Background
Kota Fibres, Ltd. was founded in 1962 in Kota, India. Created to produce nylon Fibre, Kota
Fibres provided synthetic Fibre yarns to local textile weavers mainly to make the traditional
womens dress in India; the saris. Ms. Pundir was both the managing director and principal owner
of the company. Kota Fibres used new technology and domestic raw materials to produce their
quality product. The demand for saris amounted to 12 billion yards of fabric.
Demand fluctuated based on special Indian festivals and celebrations, and more specifically
on the Diwali; a special celebration in mid-autumn. Kota had policies which required a plan of
seasonal production. Kota operated at peak capacity for two months and decrease capacity for the
rest of the year. Kota Fibres had been a profitable company through the years. Sales were up 11
percent in 2000.

Problem

Payment of excise tax to move their product

Line of credit not being repaid according to the term.
Request for new loans from All-India Bank & Trust Company.
Due to inflation, interest rate may be higher in upcoming year on the loans.

Analysis

Current ratio of 2000

= 4684237/1443637
= 3.244

Quick ratio = 1

Forecasted current ratio for 2001 = 6690525/4440345

= 1.506 (< 2.0,not acceptable)

Forecasted quick ratio

=1

Inventory turnover ratio

=53,865,911 / 1,249,185
= 43.12

Inventory conversion period ( in days) = 365/43.12

= 9 days (approx)

Receivables Turnover Ratio = 64,487,385 / 2,672,729

= 24.12

Receivables collection period (in days) = 365/24.12

= 16 days (approx)

Payable turnover ratio

= 41727114/759535
=55

Payable turnover (in days)

= 365/55
= 6 days approx.

Dividends to be paid quarterly = Rp 5,00,000

Total annual dividend paid = Rp 20,00,000

Net profit in 2000 = Rp 25,50,837

Cash left for next year =Rp (2550837-2000000)

= Rp 5,50,837
Desired Cash Balance = Rp 750000
New loan required = Rp 1,99,163

Conclusion
The proposal from Mr. A. Bajpai is good in long term but it cannot satisfy the current need of the
company. Since the credit term is of 80 days, it can put an unfavourable effect on the business.
They will have less cash on hand, huge amount in bills receivables which will not allow Kota
Fibres to be able to pay off the All-India bank before December. It may set up precedence for
other customer to demand for an increase in the credit period. Proposals from the Transportation
Manager and the Purchasing manager should be considered seriously. It can result in less
inventory expenditures and can increase the amount of overall liquidity.

Suggestion
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.

we would suggest that the company must go for this proposal as they can increase liquidity by
decreasing the inventory period from 60 to 30 days. The firm should move towards inventory
reduction cutting down the cash cycle and increase its liquidity. This will tie up less cash in
inventory that is sitting in the warehouse. From these plans, company does not have to purchase
more inventory in the first two months since it will use raw material on hand and order accordingly.