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Mukand Limited case study solution (Code: c53)

Mukand Limited case study solution
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Mukand Limited

Mukand Limited, suffered a heavy setback during the first half of 1996 (April-September), on
account of the sluggishness in the international and domestic markets. Further, the heavy interest
burden and the depressed rupee in terms of the dollar put pressure on the bottomline. It is interesting
to see whether the Company will maintain the growth rate achieved during the year 1995-96 in the
year 1996-97 and pay the same dividend to its shareholders. Considering the financial results for the
first half, the continuation of the liquidity crunch as well as the adverse market conditions will have
an impact on the working. It will be difficult for the Company management to announce the same
returns to the equity holders on an increased equity capital during the year 1996-97.The net profit of
the Company dropped by 40 percent to Rs 9.64 crores for the half year ending September 30, 1996,
from Rs 16.11 crores owing to the planned production cuts as well as the higher finance costs. The
sales also declined by nearly 14 percent to Rs 417.21 crores from Rs 483.33 crores earlier. The lower
sales helped the Company save on its operational costs by nearly one percent. The interest costs,
however, were higher at Rs 28.30 crores (Rs 24.41 crores) which led to the gross profit dipping by
22.34 percent to Rs 18.56 crores (Rs 23.90 crores).The Company made a marginally higher
depreciation provision of Rs 8.92 crores (Rs 7.79 crores) but, like the earlier period, did not make the
tax provisions and the tax liability would be determined at the end of the year.
The turnover of the steel plant had reduced due to the sluggishness in the international and
domestic markets. The massive increase in the power tariff, increase in the cost of inputs and the
relatively higher interest rates put further pressure on the profit margins. The Company has now
decided to curtail the production of the low margin products to improve its profitability. The
performance of the MKL for the 12-months period that ended in March 1996, was also the Company
managed to record a 21.56 per cent improvement in turnover at Rs 109.25 crores. The contributions
from the steel foundry of the company, the machine building and the machine tools division were
almost stagnant. The high operational costs, the increasing costs of the imported inputs, the
depreciation of the India rupee and other incremental cost of the imported inputs, the depreciation of
the operational level. The operating margins dipped from 9.73 percent to 8.8 percent. The net profit at
Rs 44.09 crores increased by 25 percent compared with Rs 35.15 crores for the corresponding 12
months last year. The sales value of the rolled products was Rs 743.70 crores as against Rs 597 crores
in the previous year. The output of the rolled products for the year 1995-96 was 212698 tonnes as
against the output of the previous year, of 197651 tonnes, the increase being mainly on account of
the larger production from the wire rod mill.
The sales of the steel foundry during the year 1995-96 were Rs 45.6 crores as against Rs 33.4
crores in the previous year. The production of steel and alloy casting was 8657 tonnes as against 7767
tonnes in the previous year. The capacity utilization continued to be low due to the stoppage of direct
purchases of bogies and couplers by the Indian Railways. According to the new policy, the Railways
has started procuring complete wagons stock from the wagon builders who have started placing the
placing the orders for bogies and couplers in the latter part of the year. The exports-direct, indirect
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and deemed of the Company and the other income in foreign exchange were worth Rs 160.9 crores
as against Rs 84 crores in the year 1994-95 an increase of 90 percent. The company had set an export
target of Rs 125 crores, and surpassed it by 28 percent. The foreign exchange outgo during the year
1995-96 was Rs 227.3 crores compared to Rs 213 crores in the previous year to Rs 66.4 crores during
the year on account of a substantial increase in the exports and import substitutions. During the year
1995-96, loans and advances of the Mukand have also increased by about 66.73 percent. It has given
loans worth Rs 15.25 to its two subsidiaries, Mukand Global Finance and Mukand McNaily
Wellman. MKL has also taken a credit of Rs 29.50 crores, which is yet to be received for the part sale
of its property in Kurla, for which the Company is involved in a dispute with the Brihanmumbai
Municipal Corporation (BMC). Besides, it has Rs 6.1 crores locked up in the Bombay Forgings a
company which has been referred to the BIFR.
According to the rehabilitation scheme drawn up by the BIFR, Mukand is required to fund
the sick unit for a gross amount of Rs 7.5 crores, which, interestingly, cannot be recovered without
the approval of some of the financial institutions. At the last Annual General Meeting, the promoters
of Mukand have sought an idenfinite extension from the Board of the Company to make the balance
payment of Rs 41.26 crores on the 22.59 lakh preferential shares issued to them in the year 1994. The
last date for making the payment was August 1996. The extension sought was due to the falling prices
of the Company scrips in the stock market and the tight liquidity situation faced by the promoters.
The company made a private placement of the equity shares, chiefly to the foreign institutional
investors in late 1994 to garner over Rs 100 crores. To neutralize the equity dilution from the private
placement, the company issued 22.59 lakhs warrants to the prompters, which were to be converted
into the fully paid up shares of Rs 10 each by August 1996, at a premium of Rs 233.50 per share. The
steep fall in the share price of the company in the last six months and the huge difference created
thereby between the allotment price of Rs 243.50 per share and the market price seem to have
precipitated the decision by the promoters.
Mukand was also in talks with some Japanese Companies for equity and technical know how
participation in the 1.25 million tonne Karnataka Steel project. Mukand will hold 25 to 30 percent
equity in the Joint Venture Company implementing this project. For the future, a lack of captive raw
material sources could continue to put pressure on the margins. Besides, the spinning off the Machine
Building Division could also result in lower revenues for the financial year 1996-97.
1. Are the problems faced by the Company periodic in nature, and when would the bad period over
the problems cease to persist?
2. Is there a case for shifting the business focus from the Indian market to export to foreign
3. Is there a case for restructuring and the business process re-engineering so that certain problems
and its impact are under control?
4. What would you recommend as a mission and goal to the Company?



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