KOTA FIBRES, LTD.

Action Plan 2001

Presented by:
Lin Li, Industry Expert
Greta Todorova, Strategic Spec.
Devashish Bharat, CFO
Jos Solis, Financial planning
Steve Condakchian, Restructuring Exp.

Company Overview

Kota Fibres manufactures synthetic fiber yarns

used for weaving colorful fabrics to make the
traditional Indian saris.

The market is huge as each of the 500 million

women in India buy nearly three saris a year.

This demand equals more than 12 billion yards

of fabric.

Indians celebrate a lot of festivals and each of

these create a demand for new clothes.
Although the demand is rising with stable yearto-year growth, there are seasonal variations in
demand. Demand for Saris peaks around Diwali.

Industry Overview
According to Porters five forces...
New entrants

Suppliers

KOTA Fibres

Substitutes

Clients

Industry Overview: Suppliers

In the past the supply of raw materials used for manufacturing

nylon yarn was uncertain and inconsistent. As a consequence
Kota has had to maintain a fairly high level of inventory.

The terms of payment are in favor of the Suppliers who give little
or no trade credit. So for Kota, there is little room for maneuver
and it must pay mostly cash to get its raw materials.

Industry Overview: Customers

Since the crucial determinants of success are

price, service and credit, Kotas customers buy
mostly on credit.

The cloth mills essentially produce to order,

building their inventories of cloth just in
advance of the peak selling season while
maintaining maintenance stock the rest of the
year.

There is an intense competition among the

cloth mills for selling to the merchants.
Merchants maintain a low level of inventory
and build them in advance of the peak selling
season.

Industry Overview: New entrants,

substitutes and competition.

Since the profit margins are low and there is a tough

competition among several existing yarn
manufacturers, the likelihood of any new players
entering is low, though consolidation is possible

Since nylon yarn is basic to the manufacture of fabric

for saris, as of now there does not seem to be a
chance of substitutes emerging.

Kotas production and distribution system

Thin profit margins forced to adopt policies against

overproduction and overstocking, which had forced us
to carry inventories through the slack season.

Since we have seasonal sales, we have a chase

strategy of production with three months of peak
production and at modest levels for the rest of the
year. This means that we have to periodically hire and
fire workers, which has in the past angered workers.

For distribution, Kota maintains two distribution

warehouses. Infrastructural problems increased the
cost of delivery to customers.

Kotas performance

Sales have been increasing every year.

Sales increased by 17.6% in 2000 and we

expect an increase of nearly 19% in year 2001.

Kota has been making profits consistently. This

can be seen from the balance sheet figures.
We hope to make a net profit of 1,335,448 in
2001.

Kotas performance
Liquidity ratios
Current
Quick
Cash

2000
3,24
2,37
0,52

2001 (f)
1,50
1,00
0,16

Cash Flow
60 Days

45 Days

85 Days

20 Days

105 Days

Summary year 2000

Despite being profitable, Kota has long operating and

cash cycles which has led to problems in its cash flow
management

Kota has a very high level of accounts receivables

which is a consequence of the nature of the trade
where in Kota.

Summary year 2000 (contd..)

The long receivables and consequently cash cycles

have led to a high level of short term debt and interest
expenses.

With the existing requirement of clearing the balances

with the bank for at least one month in the year, the
company faces tough decisions. It must meet this
requirement failing which the bankers might be forced
to withdraw its credit line to Kota

Forecast for year 2001

Kota uses a spreadsheet model to predict monthly, detailed
results on the following accounts:
Monthly demand
Accounts receivable
Inventories
Accounts payable
Revenues and expenses
In addition, this model provides pro-forma statements of:
Cash receipts and disbursements
Income
Balance sheet

Forecast year 2001 Highlights

Outstanding borrowings EOY = Rs. 2,779,599
Total interest expenses
= Rs. 1,835,620
Net Profit
Average assets
Average Notes payable

= Rs. 1,335,448
= Rs. 27,951,136
= Rs. 12,775,264

Alternatives
A) New Inventory Proposal
Reduction of raw-material-inventory
requirement from 60 to 30 days

B) Just in time (in 35 % of material purchases)

Reduction of inventory of pellets from 60 to 3
days

C) Adopting the Level-production method

Summary
Will Kota be able to remedy its cash flow situations
and clean up the bank loan by the end of 2001?
Actions/Policies under consideration:
Implementing the new inventory policies
Suppliers implementing JIT
Implementing additional policies on dividend
payments and minimum cash balances, and
Implementing a level-production strategy if the
analysis indicates a positive outcome.

Dear employees, clients and bank

partners:
The management team of Kota Fibres
appreciates both your understanding of this
situation and your cooperation to build a better
future for our company.
We will also appreciate your presence for the
analysis of the situation next week.

Annexes

Impact: New Inventory Policy

Outstanding borrowings EOY
Decrease from Rs. 2,779,599 to 2,020,765

Total interest expenses

Decreases from Rs. 1,835,620 to 1,298,255

Net Profit
Increases from = Rs. 1,335,848 to 1,712,004

Average assets
Decreases from = Rs. 27,951,136 to 24,419,018

Average Notes payable (Debt)

Decreases from = Rs. 12,775,264 to 9,037,680

Impact: New Inventory Policy + JIT

Outstanding borrowings EOY
Decrease from Rs. 2,020,765 to 1,839,873

Total interest expenses

Decreases from Rs. 1,298,255 to 1,102,934

Net Profit
Increases from = Rs. 1,712,004 to 1,951,921

Average assets
Decreases from = Rs. 24,419,018 to 23,127,282

Average Notes payable (Debt)

Decreases from = Rs. 9,037,680 to 7,683,105