Kota Fibres Ltd Case Analysis

Topics: Financial ratios, Asset, Asset turnover Pages: 8 (3165 words) Published: October 9, 2012
Name:Xiangwen Li
Course:Financial Policy
Tutor:Dr.John Thornton
Kota Fibres LTD Case Analysis

Executive summary
Kota is experiencing a number of problems. The manage director to prevent over production and over stocking has resulted to a sequence of hiring and layoffs each year. And the company is suffering from liquidity challenges because it is not in a position to finance its day-to-day activities, so its bank account stands over drawn. This situation has impacted negatively on the company's ability to repay its earlier loans and customers are upset because of delayed delivery. Mr. Mehta and Ms. Pundir introduced a new quality control unit and hired two sales representatives and three nephews with the objective of creating commitment to the Pundir family. From the case, no audit or analysis was undertaken to ascertain whether the company needed a quality control unit. This is an example of how the company is increasing its operating costs which has contributed to its current liquidity challenges. Ms. Pundir is biased toward addressing shareholders’ needs rather than pursue what is good for business survival. It is reported that the company had previously declared high dividend payments to its shareholders because Pundir believed that it was risky to leave excess funds to the company. Similarly the company does not value its employees, the company prefers hire people in high season, and firing them in low seasons. Ms. Pundir is confronted with the challenge of addressing a unique cash shortage and this has to be done immediately. As a whole, the projections indicate that Kota Fibres limited is performing well in managing their financial assets. However, the company is facing some challenges in the area of liquidity management. The company should increase its total assets. Ms. Pundir’s should engage the stockholders in seeking a lasting solution to the company`s problems. It the shareholders are involved, perhaps they will propose different alternatives rather than Ms. Pundir’s main aim of maximizing the wealth of the shareholders. If the shareholders understand the worrying situation the company is in, they may opt to reinvest a significant amount of the company`s profits which will benefit them in the long-term.

Kota Fibres Limited is a textile fiber manufacturer in India specializing in the supply of nylon fiber to textile mills in the Indian domestic market. These fibers are used to make saris, the traditional women` dress. Given the large number of the female population in India (500 million), the saris industry requires approximately 12 billion yards of fabric per year and the market size continues to expand at a rate of 155 saris per annum. Kota Fibres is run and managed as a family business from 1962 by Ms. Pundir and her family. In 2000, Kota`s performance surpassed the market average; the company registered approximately 18% growth in its sales revenues, with its net profit standing at INR 2.6 million. Despite the remarkable growth in revenue, Pundir realized that the firm was suffering from serious cash flow issues. The company`s operations had come to a halt because of a series of overdraws from its bank account. As a result, the company is suffering from shortage of short-term liquidity at a time when the textile industry`s seasonal peak in India has just began. To keep the company going on, Pundir seeks for additional financing from a bank. Kota Fibres has been in operation for over 40 years, which implies that the company has been profitable to stay this long in business. Kota`s problems are mainly attributed to its fast growth and clear measures are necessary to reduce operating costs and other expenses and restore the company to its profitable path. Statement of the Problems

Kota is experiencing a number of problems. To begin with, the seasonal production strategy implemented by the managing director to prevent over...
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