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Saraf_Foods_B4_ResearchPaper

Saraf_Foods_B4_ResearchPaper - The Saraf Foods Investment(B...

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The Saraf Foods Investment (B) Cornell University Johnson Graduate School of Management NBA 593 International Entrepreneurship Auke Cnosssen, MBA ’04 prepared this case study under the guidance of and with Professor Melvin Goldman as the basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. The Saraf Foods Investment (B) In February 2004, after eleven turbulent business years, Suresh Saraf contemplated the proposal he would make to his buyers during the forthcoming eleventh anniversary celebration. Both buyers had remained extremely loyal to the company. They accepted Saraf’s invitation to attend the event, which should provide an excellent opportunity for Saraf to discuss the company’s future. So much had finally changed for the better. Saraf was now faced with more orders than he could fill. Although he was ahead of schedule with his payments to GIIC, he still needed about 14 months to pay-off the debt fully. Until the existing loans had been paid off, taking on more debt did not appear to be a viable option given his history of losses and debt rescheduling. Again, the question was: how to finance the business. But at least this time, he could approach the issue of how to reach much higher levels of sales and profits without feeling that the alternative was failure. The 1999 refinancing After long debates and evaluation of the investment in August 1999, Varshney decided to continue supporting Saraf Foods. GVFL agreed to provide a soft loan of Rs. 3 million at 15% interest on condition that Saraf put in Rs. 3.3 million of unsecured deposits, which were to remain in the company until the soft loan was paid off. Along with the additional funding, GVFL rescheduled the Income Note and Royalty dues. On the other hand, GIIC would not grant Saraf a deferral of an additional four installments on top of the three already deferred. Rather, GIIC decided to observe the company’s performance while Saraf continued to pay interest on the regular schedule. 1
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The Saraf Foods Investment (B) FY 1999-2000 ended with a loss of Rs. 6,924,000 on a turnover of Rs. 11,743,000. In February 2000, GIIC sent out a recall notice to collect its entire outstanding debt. Supported by GVFL, Saraf submitted a new plan for the repayment of dues to GIIC. Once again, in June 2000, GVFL rescheduled outstanding royalty payments and interest on Income Notes, and reduced the soft loan to Rs. 1,500,000. GVFL and Saraf’s joint efforts led GIIC to finally agree to reschedule dues and to reduce the interest rate. Company restructuring along with the additional funding resolved the immediate problems. The company took many steps to try to emerge from the crisis. Drying cycles had earlier been reduced. The processing cycle was further reduced by optimizing processing parameters. Labor and fuel expenses were cut and improvements were made in productivity. Despite this, cash flows were not adequate to meet the financial liabilities of both GIIC and GVFL. The company ended FY 2000-2001 with the largest loss in its history of Rs. 10,062,000 on a turnover of Rs.
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