Kota Fibres, Ltd

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Case Report for Kota Fibres, Ltd.

Group 7
BA 141 (WFY)
8/11/2010

Table of Contents

Point of View .............................................................................................................................................. 1 Case Context ............................................................................................................................................... 1 Problem Definition ...................................................................................................................................... 1 Framework of Analysis ............................................................................................................................... 1 Analysis ....................................................................................................................................................... 2 Decision ...................................................................................................................................................... 6 Justification of Decision ............................................................................................................................. 6 Implementation of Decision....................................................................................................................... 7 Appendix ........................................................................................................................................................ 8 Bibliography ................................................................................................................................................ 33

EXECUTIVE SUMMARY

The group took the point of view of management for the case of Kota Fibres, Ltd. The goal of maximizing shareholder wealth was the backdrop against evaluations of the company’s health and proposals to improve the same were made.

Kota Fibres’ main problem was fairly straightforward: the management of the company’s cash holdings was inefficient. This was reflected in the smaller problems that the company faced in 2001. An evaluation of the company’s profitability showed increasing price competition; liquidity, a dispiriting debt position; efficiency; a long cash conversion cycle; and leverage, increasing dependence on borrowed capital. Coupled with unfavorable market conditions, the events responsible for Kota Fibres’ financial health confirmed the company’s weak cash position. Cash flows were not only weak, but they were also drained by large dividend distributions.

Management paid high dividends to shareholders for many years under the misapprehension that reinvesting in it in the business was necessarily riskier. Ironically, it was keeping cash out of the business that increased credit risk, devalued Kota Fibres as a manufacturing firm and reduced shareholder wealth. In addition to cutting back on dividend distributions (at least until the company stabilized), the group also recommended implementing the Transportation manager’s proposal of reducing the rawmaterial-inventory requirement to 30 days to improve the company’s cash position and meet the demands of the heavy production and selling season ahead.

I. Point of View: Management

II. Case Context

Kota Fibres, Ltd. was founded in 1962 to produce nylon fiber at its only plant in Kota, India. The company supplies synthetic fiber yarns to a steady franchise of small local textile weavers that produce colorful cloths for making saris. The synthetic-textile market in India within the time frame of the case was driven by competitions in price, service and credit. For Kota Fibres, a large end-customer base of nearly 500 million Indian women and a relatively inelastic demand for its synthetic fiber yarns made the company a profitable enterprise. In fact, unit growth in the industry was expected to be 15 percent per year. However, Kota Fibres’ profit margins began to thin due to increasing...
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