Case Study 2
A leading manufacturing sheet metal company is primarily a tier-1 supplier of crucial systems and assemblies to its automotive OEM clients, including Ashok Leyland, Bajaj, Daimler, Fiat Chrysler, Ford, Honda, Hero, JCB, Mahindra, and Maruti Suzuki Renault, Nissan, TATA, Toyota, TVS, Volvo Eicher and Volkswagen. With 8 manufacturing facilities, the company plans to set up a separate entity to cater to the increased demand from the electric vehicle segment.
The company's working capital cycle is intensive, with a cash conversion cycle of 73 days. Over the last few years, the company has been in a significant expansion phase with expansion to new geographies and product segments. With the rapid growth of CAGR 50% in the last 4 years, the company has added additional constraints in the working cycle, with extended receivable days at 93 days and inventory days at 55 days. The existing bank lines are being utilised at 90% over the last year, and new limits have been availed towards Capex to set up new manufacturing facilities.
Being in a rapid growth phase, the company focuses on expansion into new markets and product segments. The track record of top-line growth ties up with the current focus. This resulted in a stretched working capital cycle indicating high utilisation of bank limits, with no room for extending limits with primary bankers due to recently availed limits for Capex. They were looking for an ideal solution to bridge the gap through Invoice discounting for a few large vintage clients to help fund the new business
However, the high receivable cycles and limited room for expansion of working capital limit with existing bankers created challenges. Additionally, the Capex loans inflated the D/E of the company, and the existing collateral pledged to primary bankers.
Upon contacting KredX, we observed that the receivable days (3 months) is the primary driver of stretched working capital cycle. Considering the expansion focus and limited scope for extending limits with existing bankers, the company opted for unsecured bill discounting for few large corporations. This helped free up cash that was used towards the new business initiatives. Moreover, the company got the flexibility to utilise this cash to meet any short term objective, i.e. holding higher inventory, recruiting additional sales reps, undertaking additional marketing etc.