Fortune of a Company

7/31/2019 Fortune of a Company

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FORTUNE OF A COMPANY


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THE CASE: AN OVERVIEW

Company a part of diversified and profitablebusiness group

Performance of the company is tracked very closelyby the promoters

Each company works independently and they do notseek support from other group companies in anymanner.


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Company A is loss making company which has 2departments Div X( making losses) and Div Y(making standalone profits).

Company A not been performing well over past fewyears its cost of borrowing has gone up and has notbeen able to avail any long term loans

Company A enjoys loyal group of customers


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Loss incurred over last few years attributed to rawmaterial cost that cannot be passed on to customers

Somehow its competitors have been able to churnout cheaper offerings as they have access to cheaperraw materials

Company A cannot employ superior technology asdone by their competitors because it is somehowunavailable to them


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The CEO wants XYZ bank to replace the high costloan with low interest rate bearing loans (total loan =250 crores provided by Alpha Bank.

Year

X Y Total X Y Total X Y Total

Sales 650 450 1100 800 550 1350 850 700 1550

Profit -10 20 10 -40 30 -10 -70 30 -40

FY10 FY11 FY12 (prov.)


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Options with CFO:

Either, Sell off X or whole of the company. Thepromoters might not agree to latter as theysentimental value attached .Bank XYZ would takethese actions in account and decide about replacing

loanOR

Bring in a strategic investor who infuses cash andalso brings in latest technology. If this happens then

bank XYZ would take this account and decideaccordingly.


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CFO ANALYSIS

Analyze the extent of the problems.

Is the profit picture merely ailing or is it terminally

ill?

Is the company's core business still financiallyviable?


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SELL DIVISION X OR WHOLE OF THECOMPANY

Loyal customer base

Sentimental value of the company

Employment of better technology in div X could result inlower input cost for div Y through transfer pricing

Unutilized capacity in div X and saturation in div Y,calling for capacity expansion

Negative impact on valuation because of loss makingdivision X.


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Bringing in a strategic partner

1. The company is being hurt from its cost side, i.enot able to procure raw materials at low cost andtechnologically backward. Getting infusion wouldhelp it to concentrate on its core activities of

production and not worry about the costs.

2. The demand of ownership by the investor isobvious- we can give him a venture capital type of

agreement where, the capital is being provided bythe investor and management is in the hands of ourpersonnel.


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No doubt div X is in losses but it has a lot of potential. Ifit is utilized upto its capability with the help of bettertechnology it might show better results. Company Aenjoys a loyal customer base.

Plus selling of div X would not help company A muchbecause Div Y is almost at its saturation point. Until andunless the capacity is expanded it shows little promise.

Also inputs of Y consist of some material from X, sellingof X would mean outsourcing these materials fromoutside which would add to cost of Y. As it is its(Div Y)profit growth is stagnant, such addition to cost mighthave a negative effect.


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Performance of the division


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The capital bought in then would have a chain effect-

STEP I- Improve the processes to reduce the cost ofproduction of div X. This would reduce the losses of X. X

has a lot of potential to grow and a loyal customer basewould be helpful.

STEP II- Using transfer pricing, reduce the cost of finalgoods of X to Y, this would increase Y's profit.

STEP III- Plough back the increase in profits to expansionof division Y.

Fortune of a Company

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