Financing Current Assets Gee Vee Industries

Rajesh Sharma is a committed and sincere officer in the Finance Department of GEE VEE Industries Mumbai, a textile company with about Rs 2000 cr turn over. Rajesh was worried about the funds management and rushed to his section head Mr. Amitesh Agarwal and had said Sir, you have probably been aware that our company is facing financial crunch during the last few months and I am afraid that it is extending this month too and would continue if we do not take corrective steps . I propose to request our existing bankers State Bank of India and Union Bank of India to arrange funds for a period of 6 months. But I am not sure whether they will consider because we do not have supporting additional increases in sales to request for such adjustments. Our debtors are piling up and the recovery is going down, and due to the economic slow down, our products are not selling in the same tempo in the market as in the past and our order book from different retail outlet chains is not encouraging Mr Amitesh tried to pacify him stating, Hey Rajesh! Do not worry; our position is not that bad. I appreciate your concerns. I attribute the current problem to our failure in recovering the debtors effectively. Normally more than 90% of our customers used to honor their commitments within three months from the date of receiving our goods. I think that due to the economy slowdown abroad and in India our major customers are not able to pay on time. Otherwise their transactions with us have been quite good. In order to overcome the current crisis, we can raise funds through the open market. Can we also try to raise some temporary funds from our bankers and in view of the track record they will oblige us. We should do something about the funds blocked with Police departments and Indian Railwlays to whom we have made substantial supplies. We will work out modalities and prepare a note to the Chairman. BRIEF HISTORY: The company is promoted by Gee Vee Group; one of the Indias largest and fastest growing integrated Textile Groups. The company was set up in 1969 with limited capital; the Group has today emerged as a well-established manufacturer of textiles catering to the needs of millions across India. The Company was promoted by Gagan Vishnu and his sons; it enjoys the reputation of being one of the modern and largest manufacturers of processed knitted fabrics with an experience of over four decades. The Company has leveraged its experience from time to time to establish its presence in the International and Domestic markets. The Company operates in the textile industry and is engaged in the business of manufacturing cotton spun yarn, doubled yarn, knitted grey fabrics, processed knitted fabrics and garments. Its products are sold primarily to major garment manufacturers in the Domestic and International markets. The Company for the first time in India has commercially launched a new product which is useful in party wear. The Company has also launched another fabric which is comfortable as sports wear. The Company has started supplying these fabrics in large quantities to various American and European countries.

Technical Aspects: Products manufactured:

The Case is prepared by Prof. C V Kumar, Associate dean, This case is to be used for IBS Hyderabad-Class Room discussion only.

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Sr. No. 1 2 3 4 5 Marketing arrangements: Markets

Unit Spinning Knitting Processing Texturising Garmenting

Capacity in TPA 226000 Spindles 31,000 41,000 5,000 3 mn pcs

The Companys textile markets are spread over in northern, western and southern India, where major textile and garment manufacturers are located. It has not made huge presence in the eastern parts of India. The demand for the Companys products is dri ven by a number of factors, such as global trends, productivity levels of other significant textile producing countries such as China and domestic and international economic activity. Sales, Marketing and Distribution The Company markets, sells and distributes all of its products to a broad range of customers. To address the needs of its diverse customer base, the Company pursues a range of marketing, sales and distribution approaches. The Company believes its multiple marketing, sales and distribution approaches allows it to maximize its ability to serve its diverse customer base. The Companys sales force is located primarily in Mumbai and has agents and representative offices near Indias main textile manufacturing areas and major cities, such as Delhi, Chennai, Kolkata, Bangalore, Tirupur, Pune, Hyderabad and Ahmedabad , as well as in many of the major international textile markets. The Companys sales force utilizes its wide and varied customer base to work col laboratively with its customers in order to forge long-term relationships. Additionally, the Companys sales force works in conjunction with its customers at their sites to meet their evolving needs, including recommending improvements in quality and productivity. Customers Profile The Company derives its income from a varied customer base ranging from major domestic garment manufacturers to individuals purchasing yarns, fabrics or ready-made garments direct from the Company. The Company works closely with key customers to develop new products and applications to enable them to meet changing demand for their products. Most of the Companys products are sold pursuant to short-term purchase orders. The average delivery time of products ordered is approximately one month. In addition, many of the Companys fabric and garment products are sold through domestic distributors and Supply Chain stores in India and aboard.

The Case is prepared by Prof. C V Kumar, Associate dean, This case is to be used for IBS Hyderabad-Class Room discussion only.

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Prime Customers of the Company (illustrative) S. No. 1 2 3 4 5 6 SWOT Analysis Strengths : The Company has been operating in the textile business for the past 30 years. The Company will benefit from economies of scale of operations leading to better cost effectiveness vis-vis its competitors, which are mainly operating in the unorganized sector. The promoters of the Company have a long history in the Textile arena and their experience and knowledge gives an edge to the Company. The Company has a track record of successfully implementing the sequence of Expansion Plans in the said segments. The Company is already in the business of manufacturing cotton yarn, knitted grey fabrics and processed knitted fabrics. Thus, the Company is in strong position to leverage its past experiences for the proposed project. Weaknesses : The company is in a highly competitive market with tremendous price pressures. The Company is already weathering the competition from other players considering their cost effectiveness. Opportunities : The opening up of the developed country markets has thrown upon various opportunities for developing countries such as India & China. The cost effectiveness in manufacturing textile products in India will also drive the business growth. The Company through its large scale operations will position itself as a cost effective producer leading to better sales. Threats : The Indian textile Industry is distinctly characterized by large scale presence of the unorganized sector. However, the large scale of operations of the Company as well as its capability to offer end-to-end solutions will place the Company at an advantageous position vis--vis small unorganized player. Liquidity Crunch: As per the existing norms of the bankers the company had given their yearly requirement of working capital quarter-wise through their QIS returns. Expecting an increase of about 25% in their sales during 2009-10, the company projected that every quarter they would be able to generate revenues of 630 crore. But for the quarter ended Jun 2009, it could achieve Rs 525 crore only. The company was facing problem of realizing their debtors as the customers were seeking for some more time to pay their dues. The export orders were also not encouraging. Domestic Westside Life Style Pantaloons Pepe Shoppers Stop Ruff International Wal-Mart Wrangler J C Penny Louis Philippe Macys Van Heusen

The Case is prepared by Prof. C V Kumar, Associate dean, This case is to be used for IBS Hyderabad-Class Room discussion only.

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The Chairman in their recent board meeting held during August 2009 clarified to the members that the financial crunch was mostly due to piling up of debtors from reputed retail outlet chains and one or two government departments in India; he clarified that the company need not worry about the receivables from foreign debtors as they were supported by letter of credit. He added that the new products have good potential but are yet to take off. Mr Amitesh Agarwal finalized the status report on overdue debtors as follows. (Rs in crore) Particulars Jan- March 2009 April-Jun 2009 JulySep 2009 (up to Aug) Overdue Debtors of last quarter 50 100 150 Credit sales during the current 500 400 300 quarter Recoveries during the current 450 350 225 quarter Overdue at the end of the quarter 100* 150 225** * Out of Rs 100 cr Rs. 25 cr only was recovered by the end of Sep 2009. **Rs 25 cr out of Rs 225 cr pertains to the sales during April 2009 and Rs 50 cr worth of material supplied during Sep 2009 to The State Police Departments is yet to be received; as per the agreement the department will pay only after verifying the quality of the entire stock of cloth supplied to them. It is estimated that this amount will be paid only during March 2010.

The company presently enjoys the following credit facilities from SBI and other banks (consortium). (Rs in crore) Type of facility Sanctioned Limit Outstanding Balance (30 Jun 2009) Term Loan 692 337.21 Working capital 523 451.3 Non Fund Based Limits 31 16.91 The company has been submitting the Monthly Select Operational Data and QIS data to the leader of consortium regularly. The fixed assets of the company are already offered as primary security to the Term Lending banker and pari-passu charge to all the other member banks of the consortium. Similarly for working capital limits also the current assets like Raw materials, semi-finished goods and finished goods are hypothecated to the banks which were lending working capital finance. The company was not in a hurry to initiate legal action, as the customers were very reputed and that the company had to continue to do business with them in future. The offer by majority of the debtors that they would pay a penalty of 1% per month itself showed their commitment to paying the dues at the earliest possibility. The company wants to choose best possible option in tiding over the situation.

The Case is prepared by Prof. C V Kumar, Associate dean, This case is to be used for IBS Hyderabad-Class Room discussion only.

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