KOTA FIBRES, LTD.

Action Plan 2001

Presented by:

Lin Li, Industry ExpertGreta Todorova, Strategic Spec.Devashish Bharat, CFOJosé Solis, Financial planningSteve 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 year-to-year growth, there are seasonal variations in demand. Demand for Saris peaks around Diwali.

Industry Overview

• According to Porter’s five forces...

Suppliers KOTA Fibres Clients

New entrants

Substitutes

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, Kota’s 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.

Kota’s 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.

Kota’s 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.

Kota’s performance

Liquidity ratios 2000 2001 (f)

Current 3,24 1,50

Quick 2,37 1,00

Cash 0,52 0,16

Cash Flow

60 Days 45 Days

20 Days85 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 = Rs. 1,335,448

• Average assets = Rs. 27,951,136• Average Notes payable = 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