Silk - the queen of all fabrics is historically one of India's most important industries. India produces a variety of silks called Mulberry, Tasar, Muga and Eri, based on the feeding habit of the cocoons.
The sericulture industry today employs over 700,000 farm families and is mostly concentrated in Karnataka, Tamilnadu and Andhra Pradesh and to some extent Assam and West Bengal. Karnataka accounts for more than 70 percent of the country's total silk production.
Sericulture is one industry which is beneficial to the agriculturists. As in today 56 lakhs people are dependent on the sericulture industry, 5.6 million people out of which 4.7 million are agriculturists. The rest are reelers, weavers etc.
India is the second largest producer of silk, contributing to about 18 per cent to the world production. What is however, more noteworthy is the fact that India's requirement of raw silk is much higher than its current production at present. Thus, there is considerable scope for stepping up production of raw silk in the country, overcome the persistent conflict of interest between exporters of silk products and producers of raw silk.
While sericulturists want imports of raw silk to be restricted to have better market for their produce, exporters want imports of cheaper raw silk so as to be able to export more silk products at competitive rates. India has all the four varieties of silk namely, mulberry, tassar, eri and muga. It is however, disheartening to note that we have not yet been able to fully exploit this advantage and make our presence felt on the international scene more prominently than at present. For this, one has to clearly understand the strengths and weaknesses of different segments of this sector.
The strength of this industry lies in its wide base, the sustaining market demand pull especially from the Indian handloom weaving sector, the infrastructure created by the national sericulture project and the research and training capabilities.
Mulberry segment
Its main weakness is related to a poor database, diverse range of practices leading to a divergence in productivity and quality. Generally, there is weak accent on quality consistency in production, poor transfer of technology to the decentralised sector both due to poor technology absorption and poor/inadequate follow up on laboratory findings; poor market linkages barring in Karnataka, a thriving unfair trade in the post-yarn sector, low-end technology use and reluctance to costlier technologies due to fears that there might not be corresponding improvement in price realisations. Other weaknesses are inadequate emphasis on quality in the commercial seed sector, neglect of marketing linkages and the need for a basic perspective for development of the sector which clearly defined relative roles for the central and state agencies under the federal set-up.
Among non-mulberry silks, tassar is mostly produced by tribals by rearing silkworms on forest plants. India is the largest producer of tassar silk after China and is the only producer of golden muga silk. Also, India is a major producer of eri silk.
Unlike mulberry silk production, non-mulberry silk production is unsteady and fluctuates from year to year. The central silk board has not given enough attention to their R&D and extension activities in the area of non-mulberry sericulture in spite of its potential to directly help the poor. Presently, muga and eri silks are produced mostly for self-consumption. But with their uniqueness to India, they have great potential for value-added exports.
The government must give to these varieties of silk the importance that is due to them and facilitate focussed R&D, targeted extension and innovative product development for value-added exports.
Tassar
It has been noted that the following are the areas of weaknesses in production of tassar and they require to be set right
. Rearing is done outdoor on trees; natural food plants are dispersed over large areas. Thus, comprehensive extension support would entail a large number of extension agents to cater to the farmers beyond their resources.
. Also weavers are normally reelers and are not exploited by traders.
. Oak tassar culture has not yet been properly adopted, as people are new to this culture and economics are yet to be established.
. Also lack of disease monitoring and of control measures is noticed.
Eri
Eri silk which is largely produced in some eastern parts of the country has specific thermal proprieties. It can also be blended with wool, other silks, cotton ramie, jute or synthetic fibres. Areas of weakness in eri silk include:-
. Lack of systematic supply of adequate quantity of foilage.
. Lack of scientific method to check diseases
. Poor management during rearing
. Non-availability of separate rearing house and
. Absence of any well-organised marketing system
Muga
This golden yellow silk is quite unique to Assam and neighbouring areas of Nagaland and Meghalaya. It has spread to West Bengal and Andhra Pradesh as well. While basic seed production is more or less organised, commercial seed production is to be organised systematically. More research support is needed for this activity.
Cut throat competition from China
Sericulture in India has taken a severe beating with cheap silk coming from China and flooding the Indian markets.
India imported around 9,258 tonnes of silk worth over six billion rupees last year from China, the world's largest silk producer.
Nearly 49,000 hectares of mulberry crop was uprooted in Karnataka as cocoon prices crashed resulting in a loss of 3,000 tonnes to the country's overall silk production, according to statistics released by the Central Silk Board.
Dumping of silk yarn from China has affected the production of silk because the rate of cocoons in the market has come down because the demand has been reduced due to import of China silk. So farmers who were expecting a better income for their cocoons stopped because market was fluctuating. When the imported silk came in, dealers lost their interest in buying the cocoons and farmers did not get the better rates. This has resulted in 49,000 hectares of mulberries being uprooted in Karnataka. In turn the farmers have taken up other activities, other agricultural productions rather than continuing with mulberry.
According to the farmers, their crops also suffered from the third consecutive drought last year. Farmers are demanding that the government should impose anti-dumping duties on Chinese silk.
India stands second only to China in silk production. While China produced 69,000 metric tons of raw silk last year, India stood far behind with 16,000 metric tons.
Officials say India requires 120,000 metric tons of silk to meet the demand in world market and with better infrastructure facility; the sericulture industry could improve its productivity to 15 percent as against the current nine percent.
Conclusion
The bulk of Indian silk thread and silk cloth is consumed domestically. The present market context for silk in the country is one of vigorously growing internal demand for silk fabrics, with growth rates of above 10 percent per year.
With substantial government and international subsidies for silk projects and marketing schemes, the industry has been expanding rapidly over the last few years. Silk exports too are growing rapidly. Germany is the largest consumer of Indian silk.
Today only China and India are the producers in silk. Thailand, Uzbekistan also produces silk but the quantity is very small. So we will have to keep this raw silk and fabrics for them to continue in the market. Only two countries can do it. India is the largest consumer of silk fabrics by way of sarees and so many other things. So we will have to improve our silk culture.
Today the Indian silk industry is already a major player in the global scenario and the growth prospects for the industry seem to be bullish. Measures like the encouragement of further technological and economic research in the various aspects of sericulture, standardization and quality control of silk and silk products and rationalization of marketing and stabilization of prices of silk cocoons and raw silk it could expand rapidly than ever before.
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Wednesday, March 26, 2008
Financing Policy To Generate Income From Industrial Projects
Cooper Industries [Cooper], founded in 1919, by the mid 1950’s was known as the leading producer of natural gas well extraction engines and compressors. Cooper executed several acquisitions to expand its business and broaden its diversification to gain market share. Cooper’s management was highly concerned about their need to diversify since they relied heavily on the sale of oil and gas tools to industrial customers.
Likewise, earnings volatility was caused by the cyclical nature of heavy machinery and equipment sales. Regrettably, the effort to reduce the earnings volatility for Cooper Industries was not successful since sales were entirely concentrated the same industry. By 1959, Cooper ceased operations in four of the acquired companies that broadened their market, yet they did not satisfy the need to diversify the company. In order to avoid any more ineffective acquisitions, Cooper developed three criteria that must to be met for all future acquisitions, Cooper Industries, Inc.- Case (1974). Industry choice should permit Cooper major player status · Industry should be stable and enable sales of “small ticket” items.
Industry leading firms would be acquired Only acquire industry leader Cooper implemented these criteria by acquiring Lufkin Rule Company in 1967. The new strategy would ensure that Cooper’s acquisitions benefited them and their shareholders. Cooper’s next step was to acquire Nicholson File Company [Nicholson]. This paper is going to further expand and analyze this acquisition. Meeting the Criteria Nicholson as one of the largest domestic manufacturers of hand tools, led in its two main products areas: files and rasps. It had 50% share of the $50 million market for files and rasps where they had established excellent reputation for quality and brand name. Its hand saw and saw blades also had excellent reputation for quality and held a respectable 9% share of a $200 million market. Nicholson’s best asset, their distribution system, gave them a competitive advantage that was attractive to Cooper.
Aside from these attributes Nicholson was in financial trouble. Their common stock was trading at $23 to $32 per share well below its book value of $51.25 per share. The company reflected a low price-earnings ratio of 10-14 compared to 14-17 times earning for other leading hand tool companies. Every aspects of Nicholson’s business met the acquisition criterion that was previously established by Cooper.
Benefits of Acquisition
Cooper analyzed the benefits of merging with Nicholson. Cooper estimated that Nicholson’s cost of good sold could be reduced from 69% of sales to 65%. The acquisition would eliminate the sales and advertising duplication, which would lower the general and administrative expenses from 22% of sales to 19%. In addition, “75% of Nicholson’s sales were to the industrial market and only 25% to the consumer market” (page 5) compared to the inverse for Cooper, since they distributed between the consumer market at 25% and industrial market at 75%.
Synergies
Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies as separate entities. It is important to recognize the synergy that existed with the two corporations. The acquisition would provide a greater marketability for both of these companies. Both of these companies will improve their profit margin by working together instead of as competitors. When companies are acquired, competition should be reduced giving companies better opportunities to advantageously control price. In addition, the acquisition will provide growth. With each of these product lines, both of these companies together can achieve greater sales expansion. Improved distribution methods by Nicholson to Cooper would reduce operating costs to the venture as a whole.
Capital Structure
Cooper Industries should structure the deal to finance the acquisition of Nicholson. Cooper has capital structure options to finance this acquisition. They can issue debt, arrange lease financing, bond swapping, offer preferred stocks, warrants, convertible bonds and callers. These selections offer investment options for Cooper.
“Typical financing decisions include how much debt and equity to sell, what types of debt and equity to sell, and when to sell debt and equity. Just as the net present value criterion was used to evaluate capital budgeting projects, we now want to use the same criterion to evaluate financing decisions” A five-year projection (Exhibit H) has been created to demonstrate the desired progress toward the projected goal of this acquisition in regards to the synergies. Appendix A illustrates the combined financial statements without synergies in detail. In 1972, the true effect of the acquisition is felt with the increase in net income and then leveling out as the year’s progress. Earnings per share were greatly impacted by 1972. This merger also impacts long-term debts. In order to acquire Nicholson File Company, Cooper Industries would have to look for a way of long-term financing, thereby increasing its debt and debt/equity ratio.
The Cooper/Nicholson acquisition has a positive impact on both companies and it is believed that the two companies have great synergistic value. The acquisition will not only reduce operating costs but it will also reduce additional selling and administrative expenses, as well. The SG&A expenses should decrease by 10% the first year and should experience no increase in them in years after. Revenue too had a 5% increase and it too stabilized into having a consistent increase of 8% every year. The 5-year projection after the acquisition provides a positive glimpse for the future.
Pursuant to due diligence, we have compiled the following report evaluating these financing options:
· Exhibit A Income Statement Balance Sheet without Synergies
· Exhibit B Income Statement Balance Sheet with Synergies Financing With Bonds
· Exhibit C Income Statement Balance Sheet with Synergies Financing with Cooper Common Stock
· Exhibit D Income Statement Balance Sheet with Synergies Financing with Cooper Preferred Stock
· Exhibit E Summary Combined with Synergies Financing With Bonds
· Exhibit F Summary Combined with Synergies Financing With Cooper Common Stock
· Exhibit G Summary Combined with Synergies Financing With Cooper Preferred Stock
· Exhibit H 5-Year Projection Income Statement and Balance Sheet
· Exhibit I Net Present Value Calculations
This team of authors recommends a bond issue as the preferred capital financing structure for a variety of reasons. Debt capital used more than equity capital causes a higher debt to equity ratio, partners.financenter.com (2004). As this ratio increases then the financial leverage of the business increases to a point. The maximum ratio of debt to equity is achieved when a firm can no longer service its debt. The inability of a firm to service or pay its debts is termed as insolvent. Debt capital, the assumed interest rate of 8% is used, with a twenty-year term and a sinking fund for future debt retirement over the term of the debt commencing in year one or 1972.
This usage of debt rather than equity to finance the acquisition of Nicholson causes a greater return on shareholder equity since the use of other peoples money (OPM) causes a magnification on return of the existing capital structure. If the Firm were to issue more stock in lieu of debt then the existing equity structure would be diluted and the return on shareholder’s equity reduced. The objective of the Firm would be to maximize shareholders’ wealth and debt-financing structure achieves the objective better than the issuance of more shares of stock. Another cause for debt issue for the financing is linked to the United States Tax Code allowing companies to expense interest expense as a financing expense accounted for in the statement of cash flows where it is deducted from net income before taxes prior to federal income tax calculation. The boon of tax benefit is not available in many other foreign nations where interest expense is not a tax preference item.
Therefore, the 8% interest expense will reduce net income before interest and taxes dollar for dollar and subsequent income taxes at 34¢ on the dollar of earnings before interest and taxes. Furthermore, as the Firm grows, the debt to equity ratio will probably change assuming profitability and the assumptions are mainly correct. As profits are generated over time and they are kept in the Firm in the form of retained earnings at that point in time will have dropped and the total equity in the company will have grown. This is exactly what most companies look for in a merger or acquisition.
Since the acquirer and Nicholson are both companies heavily laden with inventory and that inventory needs to be financed either by cash or accounts payable to the extent that this case was analyzed prior to the new Wal-Mart/Dell Computer method of working capital financing. In this model, the vendor does not bill the purchaser (Wal-Mart or Dell or the Firm) prior to purchase but the customer thereby avoiding the need to finance. In the case of the Firm, inventory is a requirement. Depending on the industry and to the extent that cash is generated by it leveraging is needed more or less. In other words, the more cash generated from operations the less leverage required during the operations of a company notwithstanding the acquisitions. To the extent that the bond underwriters will issue bonds and the bonds will be graded (priced) to the extent of the debt to equity ratio, solvency and future value is key.
Likewise, earnings volatility was caused by the cyclical nature of heavy machinery and equipment sales. Regrettably, the effort to reduce the earnings volatility for Cooper Industries was not successful since sales were entirely concentrated the same industry. By 1959, Cooper ceased operations in four of the acquired companies that broadened their market, yet they did not satisfy the need to diversify the company. In order to avoid any more ineffective acquisitions, Cooper developed three criteria that must to be met for all future acquisitions, Cooper Industries, Inc.- Case (1974). Industry choice should permit Cooper major player status · Industry should be stable and enable sales of “small ticket” items.
Industry leading firms would be acquired Only acquire industry leader Cooper implemented these criteria by acquiring Lufkin Rule Company in 1967. The new strategy would ensure that Cooper’s acquisitions benefited them and their shareholders. Cooper’s next step was to acquire Nicholson File Company [Nicholson]. This paper is going to further expand and analyze this acquisition. Meeting the Criteria Nicholson as one of the largest domestic manufacturers of hand tools, led in its two main products areas: files and rasps. It had 50% share of the $50 million market for files and rasps where they had established excellent reputation for quality and brand name. Its hand saw and saw blades also had excellent reputation for quality and held a respectable 9% share of a $200 million market. Nicholson’s best asset, their distribution system, gave them a competitive advantage that was attractive to Cooper.
Aside from these attributes Nicholson was in financial trouble. Their common stock was trading at $23 to $32 per share well below its book value of $51.25 per share. The company reflected a low price-earnings ratio of 10-14 compared to 14-17 times earning for other leading hand tool companies. Every aspects of Nicholson’s business met the acquisition criterion that was previously established by Cooper.
Benefits of Acquisition
Cooper analyzed the benefits of merging with Nicholson. Cooper estimated that Nicholson’s cost of good sold could be reduced from 69% of sales to 65%. The acquisition would eliminate the sales and advertising duplication, which would lower the general and administrative expenses from 22% of sales to 19%. In addition, “75% of Nicholson’s sales were to the industrial market and only 25% to the consumer market” (page 5) compared to the inverse for Cooper, since they distributed between the consumer market at 25% and industrial market at 75%.
Synergies
Synergy can be defined as the value that is created by combining companies, which yields a result greater than the value of these companies as separate entities. It is important to recognize the synergy that existed with the two corporations. The acquisition would provide a greater marketability for both of these companies. Both of these companies will improve their profit margin by working together instead of as competitors. When companies are acquired, competition should be reduced giving companies better opportunities to advantageously control price. In addition, the acquisition will provide growth. With each of these product lines, both of these companies together can achieve greater sales expansion. Improved distribution methods by Nicholson to Cooper would reduce operating costs to the venture as a whole.
Capital Structure
Cooper Industries should structure the deal to finance the acquisition of Nicholson. Cooper has capital structure options to finance this acquisition. They can issue debt, arrange lease financing, bond swapping, offer preferred stocks, warrants, convertible bonds and callers. These selections offer investment options for Cooper.
“Typical financing decisions include how much debt and equity to sell, what types of debt and equity to sell, and when to sell debt and equity. Just as the net present value criterion was used to evaluate capital budgeting projects, we now want to use the same criterion to evaluate financing decisions” A five-year projection (Exhibit H) has been created to demonstrate the desired progress toward the projected goal of this acquisition in regards to the synergies. Appendix A illustrates the combined financial statements without synergies in detail. In 1972, the true effect of the acquisition is felt with the increase in net income and then leveling out as the year’s progress. Earnings per share were greatly impacted by 1972. This merger also impacts long-term debts. In order to acquire Nicholson File Company, Cooper Industries would have to look for a way of long-term financing, thereby increasing its debt and debt/equity ratio.
The Cooper/Nicholson acquisition has a positive impact on both companies and it is believed that the two companies have great synergistic value. The acquisition will not only reduce operating costs but it will also reduce additional selling and administrative expenses, as well. The SG&A expenses should decrease by 10% the first year and should experience no increase in them in years after. Revenue too had a 5% increase and it too stabilized into having a consistent increase of 8% every year. The 5-year projection after the acquisition provides a positive glimpse for the future.
Pursuant to due diligence, we have compiled the following report evaluating these financing options:
· Exhibit A Income Statement Balance Sheet without Synergies
· Exhibit B Income Statement Balance Sheet with Synergies Financing With Bonds
· Exhibit C Income Statement Balance Sheet with Synergies Financing with Cooper Common Stock
· Exhibit D Income Statement Balance Sheet with Synergies Financing with Cooper Preferred Stock
· Exhibit E Summary Combined with Synergies Financing With Bonds
· Exhibit F Summary Combined with Synergies Financing With Cooper Common Stock
· Exhibit G Summary Combined with Synergies Financing With Cooper Preferred Stock
· Exhibit H 5-Year Projection Income Statement and Balance Sheet
· Exhibit I Net Present Value Calculations
This team of authors recommends a bond issue as the preferred capital financing structure for a variety of reasons. Debt capital used more than equity capital causes a higher debt to equity ratio, partners.financenter.com (2004). As this ratio increases then the financial leverage of the business increases to a point. The maximum ratio of debt to equity is achieved when a firm can no longer service its debt. The inability of a firm to service or pay its debts is termed as insolvent. Debt capital, the assumed interest rate of 8% is used, with a twenty-year term and a sinking fund for future debt retirement over the term of the debt commencing in year one or 1972.
This usage of debt rather than equity to finance the acquisition of Nicholson causes a greater return on shareholder equity since the use of other peoples money (OPM) causes a magnification on return of the existing capital structure. If the Firm were to issue more stock in lieu of debt then the existing equity structure would be diluted and the return on shareholder’s equity reduced. The objective of the Firm would be to maximize shareholders’ wealth and debt-financing structure achieves the objective better than the issuance of more shares of stock. Another cause for debt issue for the financing is linked to the United States Tax Code allowing companies to expense interest expense as a financing expense accounted for in the statement of cash flows where it is deducted from net income before taxes prior to federal income tax calculation. The boon of tax benefit is not available in many other foreign nations where interest expense is not a tax preference item.
Therefore, the 8% interest expense will reduce net income before interest and taxes dollar for dollar and subsequent income taxes at 34¢ on the dollar of earnings before interest and taxes. Furthermore, as the Firm grows, the debt to equity ratio will probably change assuming profitability and the assumptions are mainly correct. As profits are generated over time and they are kept in the Firm in the form of retained earnings at that point in time will have dropped and the total equity in the company will have grown. This is exactly what most companies look for in a merger or acquisition.
Since the acquirer and Nicholson are both companies heavily laden with inventory and that inventory needs to be financed either by cash or accounts payable to the extent that this case was analyzed prior to the new Wal-Mart/Dell Computer method of working capital financing. In this model, the vendor does not bill the purchaser (Wal-Mart or Dell or the Firm) prior to purchase but the customer thereby avoiding the need to finance. In the case of the Firm, inventory is a requirement. Depending on the industry and to the extent that cash is generated by it leveraging is needed more or less. In other words, the more cash generated from operations the less leverage required during the operations of a company notwithstanding the acquisitions. To the extent that the bond underwriters will issue bonds and the bonds will be graded (priced) to the extent of the debt to equity ratio, solvency and future value is key.
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