Kaveri Autocomp: Is the Cash Credit Limit Enough?
Kaveri Autocomp Ltd supplies stamped components to a Pune OEM. FY 2024-25 revenue was ₹96 crore with an operating margin of 11%. The bank's cash credit limit is ₹9 crore, sanctioned on a 25% margin on current assets. The balance sheet shows inventory of ₹18 crore (raw material ₹7 crore, WIP ₹5 crore, finished goods ₹6 crore), trade receivables ₹16 crore, cash ₹1.5 crore, trade payables ₹12 crore and other current liabilities ₹3 crore. The OEM has extended payment terms from 60 to 90 days, and the company has stretched payables to 75 days to cope. Inventory rose because components for a new model were bought in bulk. The CFO must decide whether the existing limit is adequate and whether to accept a new order adding ₹20 crore of revenue at the same margin, requiring 20% more inventory and 30% more receivables, also payable after 90 days. The bank has asked for a working capital assessment before enhancing the limit.
1. Compute the operating cycle and cash conversion cycle. Using a 25% margin, assess whether the ₹9 crore cash credit limit is adequate. State any assumption you make about the denominator for payable days.
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Using revenue as the denominator because purchases are not given:
- Inventory days = 18/96 × 365 = 68.4 days
- Receivable days = 16/96 × 365 = 60.8 days
- Payable days = 12/96 × 365 = 45.6 days
- Operating cycle = 68.4 + 60.8 = 129.2 days
- Cash conversion cycle = 129.2 − 45.6 = 83.6 days
Current assets = 18 + 16 + 1.5 = ₹35.5 crore; current liabilities excluding bank = 12 + 3 = ₹15 crore; working capital gap = ₹20.5 crore. MPBF at 75% = 0.75 × 20.5 = ₹15.4 crore. If cash is excluded from current assets, MPBF = 0.75 × (34 − 15) = ₹14.25 crore. Either way the ₹9 crore limit is inadequate by roughly ₹5.3–6.4 crore. The company is filling the gap by stretching payables to 75 days, a fragile source of finance. On a purchases basis, COGS = ₹85.44 crore and payable days would be 51.2, giving a CCC of about 78 days; the conclusion is unchanged.
2. Evaluate the new order. Should the CFO accept it if the bank enhances the limit? Show the incremental working capital and return.
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Incremental revenue is ₹20 crore × 11% = ₹2.2 crore operating profit. Incremental inventory = 20% × 18 = ₹3.6 crore; incremental receivables = 30% × 16 = ₹4.8 crore; total incremental current assets = ₹8.4 crore, assuming payables do not rise. Additional MPBF at 75% = ₹6.3 crore; margin money required = ₹2.1 crore. At an 11% cost of funds, carrying cost = 11% × 8.4 = ₹0.924 crore. Net benefit = 2.2 − 0.924 = ₹1.276 crore, a return of 2.2/8.4 = 26.2% on incremental working capital. The order is profitable, but only if the bank enhances the limit by at least ₹6.3 crore and the company can fund ₹2.1 crore margin without breaching minimum cash. The 90-day payment terms merely match the OEM's terms; they do not compensate for the extra inventory. Accept subject to a written limit enhancement and a cash-flow check.
3. Recommend three actions to reduce dependence on stretched payables without damaging the OEM relationship.
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- Re-sequence inventory: phase the bulk buy for the new model using ABC analysis and a rolling 13-week material plan, targeting inventory days from 68 to 55 and freeing about ₹3.5 crore. 2. Monetise receivables: ask the OEM for supplier-financing or bill-discounting, or accept early payment at a modest discount; collecting 30 days earlier on ₹16 crore at 9% costs about ₹0.12 crore but cuts receivable days by half. 3. Formalise payables: move from ad hoc stretching to agreed 60-day terms with a small early-payment discount, and use the enhanced cash credit for the remaining gap. Avoid stretching beyond 60 days because it invites component-price increases and supply risk. The CFO should also reconcile other current liabilities and set a minimum cash buffer before accepting the new order.