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5 - Kota Fibre L td Founded in 1962 Kota Fibres L td was a...

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Kota Fibre, Ltd. Founded in 1962, Kota Fibres, Ltd was a small firm located in Kota, India. Utilizing domestic raw material and advancing technology Kota supplied synthetic fiber yarn to domestic textile mills; this yarn was used to weave vibrant colored saris. Saris are the traditional dress that women wear in India; it consists of a small blouse know as a choli, the saris would be wrapped around the waist and with the loose end over the shoulder baring the stomach. The average Indian woman purchases 3 saris a year, each sari averages eight yards of cloth and given the female Indian population of 500 million the demand is about 12 billion yards of fabric. With a demand of 12 billion yards of fabric per year needed to be supplied by Kota’s provides a stable growth for business. Demand increases with a growing population and fluctuates predictably bases on the traditional Indian celebrations, it’s most popular and when demand peeks is mid-summer for Diwali. Cloth merchants were very well known and important in its surrounding community. Most merchants offered credit to its consumers and kept a low inventory however accumulated its inventory prior to its peak selling seasons. Given the importance of merchants to the community Kota along with other suppliers had a rigid competition in order to keep its merchants. Its intense competition relied on price, service and credit line. Ms. Pundir, the managing director and principal owner of Kota Fibres, Ltd. adopted policies that will preclude overstocking and overproduction by implementing seasonal production were Kota will hire to operate at its peak capacity for 2 months followed by layoffs and resume to its average level production for the remainder of the year. Kota Fibres, Ltd. now is facing a problem of cash shortage. Consequently, the company upsetting its banker, its truckers, and its yarn customers; it sinks in a complex situation. In order to help Kota Fibres shakes off from the predicament, we firstly aim to analyze the company’s current situation to find out the reasons. By analyzing the case Exhibit 2 – Historical and Forecast Annual Income Statements, we conclude that there are three reasons on cash shortage: sales growth, declining profitability, and aggressive dividend. Exhibit 2 shows that the net sales increase to INR77 million in 2001 from INR64 million of 2000. Cost of goods sold rises by IRN 13 million. Thus, we get the gross profits in 2001 is INR10.3 million which is 0.3 million less than the year of 2000. Although the different of gross profit has no obviously change, the net profit dropped dramatically because of high operating expenses and interest expenses.
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Net profit in 2001 is supposed to decrease INR1.3 million. In 2001, the firm earned a return on equity is 11.9%. This is 9.6% lower than the return on equity in 2000, and which is also below the bank’s interest rate.
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