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Ramakrishna Motors

Established in 1950 Ramakrishna Motors Ltd.is one of the Indias pioneers in vehicle Manufacturing with a total investment of Rs.500 crore and currently has a gross capital Employed of Rs 906 crores (Annexure I).Over the years, Ramakrishna Motors Ltd, has Established a reputation as a quality-conscious company with a unique corporate culture. The company had collaboration with Tshi Mishu, Japan Ramakrishna Motors Ltd. Was Recognized internationally for its expertise in design and manufacture of a wide range of Products from general purpose engines to specialty, technology and processes. Ramakrishna Motors had a single product in the car segment named Amanda. Ramakrishna Motors Ltd. Is a part of Ramakrishna group, which besides automobile manufacturing also had an Export company? The company had enjoyed a monopoly in the passenger car segment for 50 years. However it had failed to diversify into other related products or introduce cars; in different segments. It had started its operations throughout the country and had plants located at Rajkot, Nagpur, Bangalore and Agra. AGRAPLANT The Agra plant was established in April, 1989 with an investment of Rs 150 crores. The project was an ambitious venture started with the intention of converting Agra into the Detroit of India. The required investment of Rs.150 crores was funded by the promoter as Well as various financial institutions such as International Financial Corporation (IFC), Asian Development Bank, IDBI, IFCI and ICICI. The institutions provided the funds on The basis of the future projections of the Agra plant. The plant was able to acquire funds at The rate of 6.25% from foreign financial institution namely, IFCI and Asian Development Back whereas, the loan from the Indian financial institutions namely, IDBI, ICICI and IFCI was obtained at 16%. The plant was set up on 40 acres of land which was leased from the Uttar Pradesh State Government for 99 years at the low rate of 0.05 paisa per square metre. The plant employed a total of 1,000 persons consisting of both skilled and unskilled personnel to man the unit. The Agra plant had two units namely, the gear box unit and engine unit. The machinery installed in the plant was state-of-theart technology and imported mainly from Japan. The total investment in plant and machinery was Rs. 120 crores which was depreciated under Schedule 14 of the Companies Act, 1956 at the rate of 4.75% for single shift and at the rate of 8.25% for the double shift for the purpose of Income Tax Act. The plant was initially hoping to come out with a car in the small car segment called Libra. The car was expected to capture a large market segment due to its high quality, cost competitiveness and few players in the market. However, the company failed to obtain the license for the manufacture of the vehicle due to the government requirement of foreign currency which resulted in the license going to Maruti Udyog Limited which was a foreign collaboration of Government of Government of India with Suzuki, Japan. It was therefore, decided that the Agra plant would act as a feeder plant for the Bangalore plant, which manufactured the model Amanda. The Agra plant hoped to supply 30,000 units and thereby, achieve 100% installed capacity utilization. In the early nineties the process of liberalization and globalization was ushered into Indian economy. This process of liberalization saw the end of the license raj and a number of new players in the car manufacturing segment entered the market. Due to this, the companys product faced stiff competition and there was a steady decline in the sales of Amanda. This resulted in a decline in demand of the parent plant for the products manufactured at Agra. The parent company which had a total workforce of 16,000 began downsizing and retrenched 10,000 of its employees. The Agra plant which had 1,000 employee strength downsized itself to a total of 500 employees. This plant which was set up anticipating 100% capacity utilization saw itself facing a problem of under utilization of production capacity as only 40% of the capacity could be utilized. The Agra plant being a feeder plant found itself in a loss making situation where it became difficult to recover its fixed overheads. At around this time, the Indian economy too was hit by a recessionary phase and there was an overall decline in demand in the passenger car segment. The Agra plant started considering ways to get itself out of the loss making situation. The plant has been recording a loss and although it has paid back the IFC loan, it has been unable to pay back the Indian financial institutions as a result of which it was unable to get any further funding from them. In 1999, one of its competitors Ford Company Ltd. Approach the plant with a proposal for using the unutilized capacity. The proposal was that the five Cs namely, cylinder block, cylinder head, crank shaft, cam shaft and connecting rod which the plant was making for its parent company, would be modified and homolocated for the Ford company cars. This would involve an expense of approximately Rs. 2 crores in terms of general equipment. However, specific equipment and tools would be invested by the Ford Company. In case the arrangement was discontinued at a later date, the Ford Company would take away its equipment. The arrangement would increase capacity utilization of the Agra plant to the extent of 5%. The finance manager was seriously considering this proposal and was analyzing the investment decision on the basis of Accounting Rate of Return. Questions: 1. Evaluate the companys investment decision with specific reference to the Agra plant. 2. Had you been the finance manager, would you accept Ford Motors proposal? Why? 3. Do you think the finance manager needs to be concerned about the low depreciation provision? Why? 4. What according to you is the source of finance available to Ramakrishna Motors Ltd in case it is required to finance the Ford proposal for the Agra plant?