Description
Pristine Consumer Products Ltd
Strategic Financial Management
Case study 1 Pristine Consumer Products Ltd.
Question 1
Analyze the strengths and weakness of the company and report key financial parameters you think are important.
SFM_SJMSOM 2010_Group 4
2
Strengths of the company
?
Pristine- a manufacturer of kitchen-related consumer durables has these strengths: ? distribution reach is pretty good, spread across the country ? The company has maintained excellent relationship with its distributors ? The company estimates rapid growth in the domestic market, particularly in the semi-urban and rural areas. ? It expects exports will also pick up in 2010 ? Decent credit from its suppliers amounting to 90 days SFM_SJMSOM 2010_Group 4 3
Weakness of the company
? ? ? ?
Capacity imbalances Rising transportation costs Liberal credit terms, slow overall cash cycle Inventory ordering methods is not scientific resulting in
overstocking of most inventory items as well as shortage of
some inventory items.
?
Capacity utilization can be improved by streamlining work process alignment
?
‘Budgetary control measures’ required to create financial discipline
SFM_SJMSOM 2010_Group 4 4
Financial Overview
Rs. Crs. 2005 2006 2007 2008 2009 P&L Data Sales 102.5 120 143.8 188.8 199.7 Other income 0.7 0.7 0.5 0.7 0.8 Cost of sales 69.7 81.4 97.1 128.3 135.6 Transportation costs 5.2 6.8 8.5 11.6 13.5 Advertising & sales promotion 9.3 11.2 12.3 14.2 15.0 Administrative costs 5.6 6.3 6.8 7.6 8.2 Depreciation 5.0 4.5 8.0 11.2 10.5 Interest costs 4.1 4.7 5.9 7.4 8.1 Taxes 1.3 1.9 1.9 3.1 3.3 PAT 3 3.9 3.8 6.1 6.3 Balance Sheet Data Capital 9.8 9.8 9.8 9.8 9.8 Reserves 55.5 58.5 61.2 67.3 73.4 Borrowings (Term Loan & Cash Credit) 44.5 48.1 60.0 78.0 84.0 Payables 53.3 51.8 67.9 70.8 62.7 Fixed Assets 101.3 97.3 119 125.1 117.9 Investments 5.8 6.0 5.1 6.9 7.5 Inventories (including WIP) 29.0 34.1 42.1 53.8 58.1 Receivables 17.5 22.0 26.8 33.9 37.1 Cash & Bank Balances 9.5 8.8 5.9 6.2 9.3
250 6.1 200 5 150 3 100 3.9 3.8 3 2 50 1 0 2005 2006 2007 2008 2009 0 4 Sales PAT 6.3 6 7
•Sales Turnover has increased steadily from 2005-09 •Costs have not risen as much as the sales have increased, resulting in substantial increase in PAT5 SFM_SJMSOM 2010_Group 4
Some important financial parameters
Some financial parameters 2005 2006 2007 2008 2009 Current Ratio Acid-test Ratio Cash Ratio Debt-Asset Ratio Debt-Equity Ratio InterestCoverage Ratio Fixed Assets Turnover Total Assets Turnover 0.6 0.3 0.2 0.6 1.5 2.0 1.0 0.6 0.7 0.4 0.1 0.6 1.5 2.2 1.2 0.7 0.6 0.3 0.1 0.6 1.8 2.0 1.2 0.7 0.7 0.3 0.1 0.7 1.9 2.2 1.5 0.8 0.8 0.4 0.1 0.6 1.8 2.2 1.7 0.9
Current Ratio should be around 1.33, but for Pristine it is pretty low ? Similarly, Acid-test Ratio and Cash Ratio is alarmingly very low ? Debt-Asset and DebtEquity ratios suggest Pristine to be less leveraged ? Assets Turnover ratios suggests that Pristine is operating in a capital intensive industry with FA SFM_SJMSOM 2010_Group 4 almost equally sales. 6
?
Question 2
What recommendations would you provide in light of the current financial and business position of the company?
SFM_SJMSOM 2010_Group 4
7
Question 3
Would you recommend any rethinking on manufacturing or distribution models of the company?
SFM_SJMSOM 2010_Group 4
8
Hub and spoke distribution model, EOQ model for replenishm and JIT manufacturing with increased capacity utilization is m
? ?
? ?
?
?
? ?
The company’s inventory has increased by 100% and receivables form 17 to 37. While the sales are going up, clearly the inventory and receivables are increasing at a faster rate than compared to sales. This show that company is keeping excessive inventory to service demands in all the corners of the country. A better option could be to use hub and spoke model and make 1 central warehouse in North and East India and fulfill the demand of individual dealers and stockiest from there. This will help in reducing the overall standard deviation in demand over the entire region and less stock would have to be maintained. Also the company should get strict on the payment terms with the retailers as the loose receivable policy may not be feasible for long in view of the upcoming competitive environment. The company should follow EOQ model for replenishment of the stock and to maintain right amount of inventory. JIT method of manufacturing to be followed with capacity SFM_SJMSOM utilization being improved by streamlining work2010_Group 4 process
9
Question 4
What are the steps that may have to be taken prior to the expansion of the company?
SFM_SJMSOM 2010_Group 4
10
Pristine may look at the following options:
? ? ?
Existing capacity should be utilized properly Streamlining work process alignment by identifying the bottleneck processes. Huge levels of inventory needs to be reduced to 50% of the level and can act as increased capacity.
Post that the company can look for increase in capacity, to increase its market share and also to leverage the economies of scale to deter competitors from entering in the market. The current debt asset ratio of the company is around 0.6 which shows unutilized borrowing capacity which can be used for expansion.
SFM_SJMSOM 2010_Group 4 11
Question 5
What would be your suggested financing plan for this expansion?
SFM_SJMSOM 2010_Group 4
12
SFM_SJMSOM 2010_Group 4
13
doc_291492509.ppt
Pristine Consumer Products Ltd
Strategic Financial Management
Case study 1 Pristine Consumer Products Ltd.
Question 1
Analyze the strengths and weakness of the company and report key financial parameters you think are important.
SFM_SJMSOM 2010_Group 4
2
Strengths of the company
?
Pristine- a manufacturer of kitchen-related consumer durables has these strengths: ? distribution reach is pretty good, spread across the country ? The company has maintained excellent relationship with its distributors ? The company estimates rapid growth in the domestic market, particularly in the semi-urban and rural areas. ? It expects exports will also pick up in 2010 ? Decent credit from its suppliers amounting to 90 days SFM_SJMSOM 2010_Group 4 3
Weakness of the company
? ? ? ?
Capacity imbalances Rising transportation costs Liberal credit terms, slow overall cash cycle Inventory ordering methods is not scientific resulting in
overstocking of most inventory items as well as shortage of
some inventory items.
?
Capacity utilization can be improved by streamlining work process alignment
?
‘Budgetary control measures’ required to create financial discipline
SFM_SJMSOM 2010_Group 4 4
Financial Overview
Rs. Crs. 2005 2006 2007 2008 2009 P&L Data Sales 102.5 120 143.8 188.8 199.7 Other income 0.7 0.7 0.5 0.7 0.8 Cost of sales 69.7 81.4 97.1 128.3 135.6 Transportation costs 5.2 6.8 8.5 11.6 13.5 Advertising & sales promotion 9.3 11.2 12.3 14.2 15.0 Administrative costs 5.6 6.3 6.8 7.6 8.2 Depreciation 5.0 4.5 8.0 11.2 10.5 Interest costs 4.1 4.7 5.9 7.4 8.1 Taxes 1.3 1.9 1.9 3.1 3.3 PAT 3 3.9 3.8 6.1 6.3 Balance Sheet Data Capital 9.8 9.8 9.8 9.8 9.8 Reserves 55.5 58.5 61.2 67.3 73.4 Borrowings (Term Loan & Cash Credit) 44.5 48.1 60.0 78.0 84.0 Payables 53.3 51.8 67.9 70.8 62.7 Fixed Assets 101.3 97.3 119 125.1 117.9 Investments 5.8 6.0 5.1 6.9 7.5 Inventories (including WIP) 29.0 34.1 42.1 53.8 58.1 Receivables 17.5 22.0 26.8 33.9 37.1 Cash & Bank Balances 9.5 8.8 5.9 6.2 9.3
250 6.1 200 5 150 3 100 3.9 3.8 3 2 50 1 0 2005 2006 2007 2008 2009 0 4 Sales PAT 6.3 6 7
•Sales Turnover has increased steadily from 2005-09 •Costs have not risen as much as the sales have increased, resulting in substantial increase in PAT5 SFM_SJMSOM 2010_Group 4
Some important financial parameters
Some financial parameters 2005 2006 2007 2008 2009 Current Ratio Acid-test Ratio Cash Ratio Debt-Asset Ratio Debt-Equity Ratio InterestCoverage Ratio Fixed Assets Turnover Total Assets Turnover 0.6 0.3 0.2 0.6 1.5 2.0 1.0 0.6 0.7 0.4 0.1 0.6 1.5 2.2 1.2 0.7 0.6 0.3 0.1 0.6 1.8 2.0 1.2 0.7 0.7 0.3 0.1 0.7 1.9 2.2 1.5 0.8 0.8 0.4 0.1 0.6 1.8 2.2 1.7 0.9
Current Ratio should be around 1.33, but for Pristine it is pretty low ? Similarly, Acid-test Ratio and Cash Ratio is alarmingly very low ? Debt-Asset and DebtEquity ratios suggest Pristine to be less leveraged ? Assets Turnover ratios suggests that Pristine is operating in a capital intensive industry with FA SFM_SJMSOM 2010_Group 4 almost equally sales. 6
?
Question 2
What recommendations would you provide in light of the current financial and business position of the company?
SFM_SJMSOM 2010_Group 4
7
Question 3
Would you recommend any rethinking on manufacturing or distribution models of the company?
SFM_SJMSOM 2010_Group 4
8
Hub and spoke distribution model, EOQ model for replenishm and JIT manufacturing with increased capacity utilization is m
? ?
? ?
?
?
? ?
The company’s inventory has increased by 100% and receivables form 17 to 37. While the sales are going up, clearly the inventory and receivables are increasing at a faster rate than compared to sales. This show that company is keeping excessive inventory to service demands in all the corners of the country. A better option could be to use hub and spoke model and make 1 central warehouse in North and East India and fulfill the demand of individual dealers and stockiest from there. This will help in reducing the overall standard deviation in demand over the entire region and less stock would have to be maintained. Also the company should get strict on the payment terms with the retailers as the loose receivable policy may not be feasible for long in view of the upcoming competitive environment. The company should follow EOQ model for replenishment of the stock and to maintain right amount of inventory. JIT method of manufacturing to be followed with capacity SFM_SJMSOM utilization being improved by streamlining work2010_Group 4 process
9
Question 4
What are the steps that may have to be taken prior to the expansion of the company?
SFM_SJMSOM 2010_Group 4
10
Pristine may look at the following options:
? ? ?
Existing capacity should be utilized properly Streamlining work process alignment by identifying the bottleneck processes. Huge levels of inventory needs to be reduced to 50% of the level and can act as increased capacity.
Post that the company can look for increase in capacity, to increase its market share and also to leverage the economies of scale to deter competitors from entering in the market. The current debt asset ratio of the company is around 0.6 which shows unutilized borrowing capacity which can be used for expansion.
SFM_SJMSOM 2010_Group 4 11
Question 5
What would be your suggested financing plan for this expansion?
SFM_SJMSOM 2010_Group 4
12
SFM_SJMSOM 2010_Group 4
13
doc_291492509.ppt