Kota Fibers Limited

Dave Balino                                                                        February 20, 2016

Fernando Gabriel D. Cortes

Jeffrey Jerome Dizon

Margaret Loise Saquido

Kota Fibers Limited

Company Background

Kota Fibers, 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 Fibers 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 INR 500,000 per quarter to the owners. Also, Kota Fibers has a line of credit at the All-India Bank & Trust Company. Kota Fibers 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.

Problem of the Case

Kota Fibers had a line of credit with All-India Bank & Trust company, their short term interest rate was 14.5%, and they were worried about the interest rate being increased due to inflation in the upcoming year.  Kota Fibers failed to make full repayment on time to the bank due to sales coming in lower than predicted.  The Bank refused to extend anymore seasonal credit until a reasonable financial plan for the company was presented. This plan must include clearing up the past loan by year end 2001. Because of Mrs. Pundir’s mismanagement of Kota Fibers, this has placed them in a state of inefficient cash flow and because the company has anticipated a heavy selling season, this problem requires a solution that will generate cash immediately. This however is not the only problem, the other problems consist of the company’s inefficient cash holdings, the company’s outstanding line of credit in 2001, the company’s profitability showed increasing price competition, liquidity, debt position, efficiency, long cash conversion cycle, leverage and borrowed capital. This weakened the financial health of the company’s cash flow and devalued the company as a manufacturing firm.