Submitted to: Dr. S.V.Ramana Rao

Presented By: Nikita Gupta (86) Sravya Palukuru (88)

Shruthi Gundu (76) Rajiv Krishna (78) Lok Prashanth (90)

Presentation on Case AnalysisReliable TEXAMILL

Limited

INTRODUCTION: WORKING CAPITALA measure of both a company's efficiency and its short-term financial health. The working capital is calculated as: Working Capital: Current Assets- Current Liabilities

The working capital ratio (Current Assets/Current Liabilities) indicates whether a company has enough short term assets to cover its short term debt. Anything below 1 indicates negative W/C (working capital). While anything over 2 means that the company is not investing excess assets. Most believe that a ratio between 1.2 and 2.0 is sufficient.

Company Profile CMD of Reliable Texamill Ltd. – Mr. Shyam Lal RTL commenced production in 2005 It manufactures synthetic blended yarn which is a raw material

for other textile weaving mills and also for handlooms and power looms.

The company is situated in an industrially less developed area in Northern state.

The synthetic yarn originates with the mixing up of the different fibers i.e. acrylic. Polyester and Viscose as per the blend proposed to be manufactured.

COMPANY BACKGROUND

The company has licensed capacity of 80000 spindles and existing installed capacity of 26390 spindles (this includes 6210 spindles added during FY 2007-08).

The average capacity utilization of the company was 81% during FY 2006-07 and 85% during FY 2007-08.

In the year 2005-06, the company could generate net sales of Rs. 191.13 lakh, and incurred a net loss of Rs. 57.11 Lakh. The acute power shortage was the dominant reason.

RTL has since been able to increase its sales to Rs. 973.32 Lakh in 2006-07 and to Rs. 1,203.61 Lakh in 2007-08 as against the estimated sales of Rs. 1,767.55 Lakh. It produced 1,315 tons of yarn in 2007-08 against 1,182 tons during the previous year.

The management of RTL has distributed the lower actual sales to the sluggish market conditions that prevailed during the second half of the year 2007-08, forcing the company to keep its production at low level, and also to a certain extent due to the company manufacturing substantial quantity of yarn of lesser counts and blends of lower value to suit the market conditions.

After incurring a loss in the first year, the company made a net profit before depreciation of Rs. 32.42 Lakh in 2007-08.Power cuts, high input costs and increased administrative expenses on account of expansion resulted in poor profitability.

RTL has not so far paid any tax and dividends. Its tax Liability is expected to be nil for quite some time as it enjoys tax benefits being a new unit located in an industrially less developed area.

PRODUCTION FACILITIES

The company’s existing production facilities are considered adequate for operating the spinning mills at the enhanced installed capacity.

The production process for obtaining the main product, viz.. The synthetic yarn , originates with the mixing up of the different fibers i.e. acrylic, polyester and viscose as the blend proposed to be manufactured.

The annual consumption of these fibers generally depend on the product mix manufactured during the particular year; the actual consumption during the years 2006-07 and 2007-08 being about 1,973 tons and 2,303 tons, valued respectively at Rs. 713.11 Lakh and Rs.902.30 Lakh.

Because of the frequent power cuts, the company built up adequate captive power generating capacity by installing one more set of 860 kVA diesel power generator.

RTL is now planning to replace two sets of 250 kVA by the purchase of one imported SKODA set of 869 kVA at a cost of Rs. 47.70. The new set is expected to be more economical from the point of view of diesel consumption and usage for longer period.

Competition and Selling

The company’s end products cater to the needs of large and medium scale manufactures of fabrics and also handlooms and power looms

The major accounting , for 80-85 percent of sales.

The remaining 15-20 percent is sold to small dealers and traders.

About 65 percent of the company’s sales are being affected on credit terms ranging from 45 to 60 days depending on market conditions.

Its four branches located in different parts of the country manage the selling operations of the company.

The company has been finding it difficult to realize its dues within the normal credit period allowed to customers.

The company however, allows a discount ranging between 2 to 2 and half per cent for sales on demand/cash basis.

Expansion

After starting commercial production in 2005 it had planned for installation of 20,000 additional spindles

Since the company incurred a loss in the very first year, The company attempted a modest expansion programme involving installation of additional 6,210 spindles during 2007-08

The expansion programme was completed with a capital expenditure of about Rs.276 lakhs against the estimated of Rs.253 lakhs

FUTURE PROSPECTS

The prices of the basic raw material, viz., viscose/polyester fibers, are lower in the international market than in India.

While the prices of viscose/polyester fibers have increased substantially during the last 2 years i.e., 2006-07 and 2007-08, the prices of RTL’s end products have, more or less, remained at the same level. The company has not been able to absorb in the selling prices, the increased cost of inputs.

With the consumer preference during the recent years having shifted to blended fabrics and the company’s products being of good quality and well accepted in the market.

RTL produced 1182 tons and 1315 tons of yarn during the years 2006-07 and 2007-08 resp.

In 2008-09, it has planned production of 1758 tones. RTL’s production plan for 2008-09 has been devised keeping

in view the changes in the market conditions and other factors.

RTL has planned to manufacture more quantities of yarn in blends of higher value during the period 2008-09. Those blends are expected to be more acceptable in the market.

The company has projected its energy costs at about 3.4 % of the total cost of production. The other expenses have been estimated in line with the past experience.

RTL had depended on trade credit for meeting its working capital needs and the trade credits forms about 1/3rd of the current liabilities.

The normal credit period allowed by the suppliers is 45 days. In the past, creditors did not object to RTL’s stretching of

payment to them. In view of the credit squeeze, they are likely to pressurize

hard for early payment of dues.

Questions and AnswersQ 1.critically evaluates RTL’s performance and financing of its operations.

In the year 2005-2006, The Company has faced a Net loss of RS.57.11 lakh.

This loss is due to power cuts and teething troubles. In the year 2006-07 the company has generated a Net profit

of Rs.24.48 lakh. This increase in profits is due to enhanced capacity of the

spindles, Effective usage of Raw materials. RTL is received in the market and is supposed to enjoy a

premium over the yarn manufactured by other leading manufacturer in the country.

Q 2 – How has the company managed its working capital in the past? Illustrate with appropriate calculations.

RTL has dependent on quiet substantially on trade creditors for meeting its working capital need.

Trade credit forms one third of the current liability. ( In 2007, 32% is the trade creditors in total current liabilities. Again in 2008 it is 30%.But they projected in 2009 the percentage should decreases to 8%.)

About 65% of the company’s sale are being affected on credit terms ranging from 45-60 days depending on the market conditions.

The company is allowing 2- 2.5 % discount for sales on demand or cash basis.

The normal credit period allowed by the suppliers is 45 days.

However, a discount of 2 % for payments within 15 days of the purchase date is allowed.

Refer Excel sheet for further Calculations.

Working Capital Calculations

Working Capital = Current Assets-Current Liabilities

Year 2007 2008 2009Current Assets 580.03 757.47 913.59Current Liabilities 625.95 805.78 866.16Working Capital -45.92 -48.31 47.43

Debt Turnover Ratio

Debt Turnover Ratio = Net Sales/ Avg Receivables

Year 2007 2008 2009Net Sales 973.32 1208.61 2185.94Average receivables 293.25 269.48 303.19

Debt Turnover Ratio 3.31907928 4.484971067.20980243

Average payable period = 365/ Debt Turnover Ratio

Year 2007 2008 2009

Average payable period 109.970256 81.382910950.6255204

Creditor Turnover ratio

Creditor Turnover ratio = Net Purchases/ Avg Payables

Year 2007 2008 2009Net Purchase 685.94 933.67 1649.36Average Payable 200.94 239.16 70.79

Creditor Turnover ratio 3.41365582 3.9039555123.2993361

Q 3-What are RTL’S plans to improve its working capital management? Show the calculation of operating cycle to justify your answer.

RTL planned to replace two sets of 250 kVA by the purchase of one imported SKODA set of 869 KVA at a cost of Rs.47.70.

It planned to undertake an expansion Program for installation of another 20000 additional spindles. This expansion Program was completed with a capital expenditure of about Rs.276 lakh against estimated cost of Rs.253 lakh.

It also has planned to manufacture more quantities of yarn in blends of higher value during the period 2008-2009.

Q 4- do you accept the financial plan prepared by RTL? What modification would you suggest in the plan and why?

The financial plan of the firm is to increase the sales by producing high quality yarn and also increase the production.

Many factors are supporting their plan 1. The power supply in the state is showing signs of improvement. 2. Consumers prefer good quality blended fabrics and RTL is known for its premium product. So, if the company goes for increasing its production then the company will get more number of customers.Scope for Modification –

They may go for importing their basic raw materials from the international markets as prices of polyester and fibers are lower in international market.

In domestic market they are procuring raw material at a high price. They may go for strategic supplier relationship management.

They have scope for increasing their production capacity up to 80,000 spindles as they are currently using 26390 spindles.

From the future perspective, they can also go for one more diesel power generator so that they can maximize capacity utilization.