Kota Fibers

Executive Summary

Kota Fibres, LTD.

October 3, 2012

Kota Fibres, Ltd. was founded in 1962 in order to produce nylon fiber at its plant in India. The fiber yarns are used to produce saris. Kota Fibres manufactures the yarn and acts as the intermediary in the fiber process. The demand for nylon fibers is 12 billion, and the company represents a stable and growing business. However, there is a seasonal peak in demand during mid-autumn, due to the Diwali celebration. Due to seasonal demand, the merchants maintain low levels of inventory throughout the year, and dramatically increase their inventory before and during the two- month peak-selling season. Seasonal demand creates a constant hiring and laying off of employees, which results in retraining efforts. The company has two distribution warehouses to provide timely service to its customers, yet the roads between the warehouses are often in poor condition, causing distribution delays. Overall, the company is profitable, experiencing an 18% sales growth in 2000. The firm is a family owned business; therefore, the managing director pays dividends of INR500,000 per quarter to the owners. Also, Kota Fibres has a line of credit at the All-India Bank & Trust Company. Kota Fibres has a cleanup requirement to pay off their loan with the bank by October, and this date was changed to December, due to the company’s less than adequate cash balance.
  * Because no credit is given to the manufacturers, the accounts payables exhibit a minimum term, whereas the accounts receivable exhibit a maximum term. Therefore, there is a large gap between the cash flows of the company.
  * The supply of orders is delayed (AR), so the firm runs out of cash for other needs.
  * The excise tax (15%) poses a liquidity issue for the firm, requiring INR750,000 cash on hand.
  * If the firm pays out dividends of INR500,000 quarterly, then INR2,000,000 dividends will be distributed per year....