Kota Fibers Essay

3088 words - 13 pages

Case 9 Kota Fibers, Ltd.
Kota Fibers, Ltd. was founded in Kota, India in 1962. Kota produced nylon to provide synthetic fiber yarns to local textile weavers. The synthetic fiber yarns were mainly used to make traditional women’s colorful dresses in India called the saris. One sari averaged eight yards of fabric. Indian women usually purchased three saris every year. India’s female population is around 500 million, with a demand for saris accounting for more than twelve billion yards of fabric and a stable business. The demand was being supplied by domestic textile mills that fulfilled their yarn requirements from suppliers like Kota Fibers. Kota used new technology and domestic raw ...view middle of the document...

Over the years, Kota had been profitable. Kota’s sales had grown at an annual rate of 18 percent in 2000.
In early January 2001, Mrs. Pundir was faced with some problems. The first problem was that the government tax inspector would not clear their trucks for delivery, because the excise tax had not been paid. Mr. Mehta, the company’s bookkeeper, went to draw funds for the excise tax when he discovered that the company had overdrawn its bank account again. This created another problem of requesting new loans from All-India Bank and Trust Company. The company needed to figure out a solution to restore the firm’s liquidity. Another problem consisted of Kota’s seasonal line of credit from the bank. Kota had a required cleanup month, usually being in October. Kota Fibers failed to make a full repayment in October, but had promised to repay in November or December. When they failed to repay during all three months, the bank refused to extend anymore seasonal credit until a reasonable financial plan for the company was presented. A final problem that existed was due to inflation. Mr. Mehta was worried the interest rate would be higher in the upcoming year on all their loans.
Kota Fibers Ltd. growth rate in 2000 was 17.647 percent and in 2001 it was 19.814 percent. Using the endpoint model with years 1999 to 2001 the growth was 18.73 percent.
Mrs. Pundir needed to read the memos from some of the company’s managers to help solve some of the company’s financial problems. The field sales manager requested permission to grant favorable credit terms of 80 days, to a new customer, Pondicherry, who would become one of their largest accounts. Their sales would increase by 6 million rupees. The transportation manager wanted to inform Mrs. Pundir about a new road between Kota and New Delhi making shipments more reliable. It included a proposal to reduce raw material inventory from 60 days to 30 days. A third memo was from a purchasing agent with a proposal from Hibachi Chemicals to supply polyester pellets on a just-in-time basis. If the proposal is feasible, the pellets inventory would be reduced from 60 days to only 2-3 days. The last memo that was on Mrs. Pundir’s desk was from the operations manager with a recommendation for level annual production instead of seasonal production. He found the following advantages: 1) gross profit margin would rise by 2-3 percent due to a stable work force 2) Seasonal hirings and layoffs are not necessary and the workforce would be stronger with less division among employees 3) lower manufacturing risk because less equipment breakdowns and can match routine maintenance better.
The total change in assets in the base case from year 2000 to 2001 is $2,346,674. There are 3 groups for the investment requirements. Addition to retained earnings, and spontaneous source of operations, which are both internal, and addition to funds needed to raise the capital market which is external. We have an AFN of $147,608, addition to...

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