1. Financial Analysis and Forecasting 52-251-02
Case Analysis: Kota Fibres, LTD
Part I: Introductions
MBA Intensive 2003
Group: E14
Team:92

2. Company background
Produced synthetic fiber yarns used in weaving cloth for saris since 1962
One centralized production plant in Kota, India
Two warehouses for distribution
Using new technologies and domestic raw materials with a steady franchise

3. Synthetic Textile Market
Stable year-to-year growth
Predictable seasonal fluctuations
High competition between the yarn manufacturers
Differentiation through service and credit
Total potential equivalent to 12 billion yards of fabric

4. Company Operation Sales growing steadily 15%-20%
Consistently profitable but with thin margins
Chase production system that involves hiring and layoffs
Kota is far from its customers
No adequate infrastructure for shipping

5. Problems (1) Sales are increasing however profits are decreasing
Unable to repay line of credit
Operational problems due to low Liquidity
Customer not getting their deliveries in a timely fashion
Labor unrest due to the current production system
Bank
With decreasing profits. We are concerned with your growing debt obligations to us.
By the end of the year both your AR and Notes payables will be higher than the beginning of the year.
You need to control your cash and expenses more effectively. How will this happen?
We are very concerned with your inability to clear up your loan and it puts us in a tough situation.
We need to know how long before you get your cash under control in order for us to provide you with a loan that will meet your requirements if any at all.
We would like to know the ROI for your technological investments you have made. Only reason being you cannot clear up your loan yet invest in technology.
Along the same lines….how can you maintain such high dividends with decreasing profits and increasing debt?
If this trend continues….we are simply concerned about your ability to pay back the interest. We need to resolve this by next Wednesday.
You are pushing more sales (hiring two new sales agents) while your profits are decreasing…are you investing in the right area?
Customer
My deliveries are late and may affect my deliveries to my customers. There are many other suppliers….this is unacceptable.
We heard through the grapevine that you were considering pushing their terms to 80 days. We want 80 days too!!
Employee Representative
How do I provide to my family with these constant layoffs? Will this ever change?
I have another problem….you have laid me for the last three years…I have experience and you hire three nephews…don’t they get family money through dividends?

6. Problems (2) Collection of Accounts Receivables impacts cash flow
Raw material purchases two months ahead of sales thus increasing the inventory
Wage structure (34% of previous month purchases) leads to huge payments during seasonal peak
Increasing interest rates could worsen the situation
Inventories and A/R are increasing year over year
Bank
High level of inventory is a concern. These need to be lowered. Focus on inventory turns.
In the increasing income environment the risk of inflation is also increasing for the coming year. Are you prepared for this?
As you are aware the interest rates are equally dependent on inflation and we have the policy of adapting them accordingly! What are your provisions on this issue and are you taking proactive steps?
Suppliers and Customers
We have been very accurate meeting our deadlines, which is very convenient for you. We have a high demand and find it difficult to finance such long credit terms in the future. Interest rates are possible going to increase. Can you pay us within two weeks?
We can provide JIT delivery of 2-3 days – are you interested in this and could you reduce the credit and pay us upon receipt? With the risk of inflation we fear the high cost of these granted credits.

7. Options to investigate (1)
Different credit arrangements with current supplier
Different credit policies with customers
Increase collections on A/R by using incentives
Favorable credit terms for new important customers
Relax the cash balance constraint during seasonal peak

8. Options to investigate (2)
More efficient manufacturing and delivery process
Change the inventory policy (60 to 30 days)
Delivery lead times of certain supplies (60 to 2-3 days)
Leveled production to reduce costs and labor unrest
Reduce or cut the dividends payouts especially during peak season

9. Stakeholders
Bank
Customers
Suppliers
Employees

10. Bank Sustained growth–want you to succeed BUT need to secure your loan
Control Cash
High accounts receivable and inventory
Inflation + interest increase - prepared?
Effectiveness of investments
High dividends despite debt
Focus on growth and profitability

11. Customers + Suppliers Customers Suppliers Late deliveries unacceptable
80 days credit
Suppliers
Can you pay us within two weeks?
JIT delivery can you pay us upon receipt?
Do you intend to go JIT with all suppliers?
If yes how much notice will you give?

12. Employees Firing and Hiring does not provide security for my family.
Will this ever change?
Or I will look elsewhere!
I have experience and you hire three nephews…don’t they get family money through dividends?
What are their contributions?