Anandam Manufacturing Company Harvard Case Solution & Analysis

Anandam Manufacturing Company Case Study Solution 

Introduction

Agarwal is the owner of the Anandam Private limited which is a Garment Manufacturing Company.Due to funding issues Agarwal currently approached the bank for additional funding of INR 50millionfor which he have submitted a detailed proposal and the Bank have put his request of loan on Process.

Agarwal and his wife are the only shareholders of the Company, and they had pledged their assets of Anandam for the loan of INR 25 million for their business and due to difficulty in procuring loan Agarwal has also provided collateral security of his residence. Agarwal has worked for 12 years in a local garment manufacturing company and is a qualified engineer.

India was the second largest producer of garments in the world garment industry having acompound annual growth rate of 13% over the next 10 year period. Agarwal was familiar with the complete process of garment manufacturing and he also recruited Ragini to resolve his problem.Anandam has continuous growth because of the new creative design, good quality fabrics and fine furnishing details and there is a sizeable share of the market available which is yet to becaptured.

Agarwal is in need of new machines, larger location and new skilled laborers and some additional staff members, he’seagerly waiting for thedecision pending by the bank for the approval of hisloan request.

Problem statement

Agarwal has no particular knowledge of how to deal with the financial dynamics of the business which is also one of the reasons for funding issues. Unavailability of funds leads Anandam towards having low working capital for the regular purchase of raw material; the customers have more stress on credit rather than cash and the unfulfilled requirement of new machinery and insufficient space in the factory.

Company have observed stock piling up in the factory which does not dispatch, or the customer delayed the delivery causing lack of space in the factory.

The high threat of new entrants in which the newcomers have easy gateway strategycapturingan attractive market withno obstacles.  This leads international players entering towards Indian textile market.

Not only the Company but also the overall Indian textile industry face insufficiencies like shortage of skilled laborer and energy, and transportation cost, etc.

An Analysis of the statement of Cash flow for Anandam

The cash position of Anandam has reached to INR 106,000 from INR 40,000 which shows a significant increase of165% in two years.

While comparing the performance of 2014 with 2015, there is only increase of INR 6,000 at FY2015,but there is significant movement in cash inflows and outflows during the year.

It looks like Anandam constantly focuses on improving his cash earnings from operations yearly as there is extreme change among revenues in each of the year.

Anandam has invested thehigh amount in property plant and equipment in two years which have to increase the fixed assets by approximately 150%. However, Agarwal still needs the new machines which will in future take into effect the graph of investment. Agarwal have already unfavorable ratio of return on fixed asset, fixed asset turnover and total asset turnover in comparison with the industry’saverage of key ratios, therefore, it is possible that Agarwal may have a right motive or the machines are not effective.

Since the Anandam not only invested significantly on fixed assets but also faced high operational charges and three times higher creditor limit compared to last year due to which the company is facing financial liquidity and funding problem which eventually result in amplified long-term liability.

Common sizing the Balance Sheet and Income Statement

       
2013 2015 2013 2015
Figures are in thousand
Sales                     200                     800 10% 10%
Cash Credit                 1,800                 7,200 90% 90%
Total sales                 2,000                 8,000 100% 100%
Cost of goods sold                 1,240                 4,800 62% 60%
Gross profit                     760                 3,200 38% 40%
Operating expenses:
General, administration. and selling expenses Depreciation
Interest expenses (on borrowings)
                    240                 2,000 12% 25%
Profit before tax (PST)                     520                 1,200 26% 15%
Tax  30%                     156                     360 8% 5%
Profit after tax (PAT)                     364                     840 18% 11%
Balance sheet 2013 2015 2013 2015
Figures are in thousand
Assets
Fixed assets (net of depreciation) 1,900 4,700 74% 51%
Current assets
Cash and cash equivalents 40 106 2% 1%
Accounts receivable 300 2,100 12% 23%
Inventories 320 2,250 13% 25%
Total 2,560 9,156 100% 100%
Equity & Liabilities
Equity share capital (shares of
Z10 each) 1,200 2,000 47% 22%
Reserve & surplus 364 1,876 14% 20%
Long-term borrowings 736 2,500 29% 27%
Current liabilities 260 2,780 10% 30%
Total 2.560 9,156 100% 100%

 

Calculation of trend analysis among the present year

           
2013 Growth in 2013 to 2014 2014 Growth in 2014 to 2015 2015
Cash 200 140% 480 67% 800
Credit 1,800 140% 4,320 67% 7,200
Total sales 2,000 140% 4,800 67% 8,000
Cost of goods sold 1,240 128% 2,832 69% 4,800
Gross profit 760 159% 1,968 63% 3,200
General, administration, and selling expenses 80 463% 450 122% 1,000
Depreciation 100 300% 400 65% 660
Interest expenses (on borrowings) 60 163% 158 115% 340
Profit before tax (PST) 520 85% 960 25% 1,200
Tax (. 30% 156 85% 288 25% 360
Profit after tax (PAT) 364 85% 672 25% 840

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