Timely intervention saves a unit closing down
In the third case study on how the Telangana Industrial Health Clinic (TIHCL) successfully intervenes and rescues sick MSMEs, we present the case of Deccan Pulverizers:
Deccan Pulverizers is a private limited company in the business of manufacturing silica/potash powder from quartz/feldspare mineral stones. The final product is used as raw material in ceramic, glass, paint and electrical industries. It has its registered office at Hyderabad while the factory is situated at Talakondapally village in Mahabubnagar district of Telangana.
There are 3 promoters for the company.
The project was conceived basis expected export orders. It had availed a term loan of `6.2 million from Andhra Pradesh State Financial Corporation (APSFC), which was used for constructing a factory shed and purchasing machinery. While the machinery was bought as proposed in the project report, the company lacked any formal working capital arrangement. It was entitled for incentives from the State Government of an amount of Rs 2.1 million, including investment subsidy of Rs1 million, which were not disbursed. While the machinery was ordered as soon as the loan was sanctioned, there were delays in installation on the part of the vendors. The unit did not receive the expected export orders and the promoters searched for buyers in the local markets. In initial stages, it could not find buyers who could pay for the material in 60 days and this led to delay in receivables, which in turn impacted repayment of the term loan to APSFC. This resulted in levy of penal interest.
PROMOTERS USING OWN FUNDS
The factory shed was damaged due to the rains during the cyclone in the state and the repairs were carried out by the promoter using his own funds. Besides, it was found that the project was not viable with one unit of the machinery as the margins were too low in the local markets and the promoter installed a second unit using his own funds and increased the unit’s production capacity. Soon, things started looking brighter to the extent that the entire production of the unit was purchased by one company. But because the repayment of the loan to the APSFC became irregular, the latter issued a demand notice asking the unit to pay overdue interest and instalments amounting to `2 million within a short notice period and threatening legal action in case of failure. The promoters were in great stress and could not find alternative sources of funding even as their collaterals were locked up with the APSFC, which even threatened sale of these collaterals. As a last resort, the promoters approached TIHCL for a resolution.
PROMOTERS KEENNESS
TIHCL held discussions with APSFC and ascertaining its preparedness for revival, it carried out a dule diligence. During this process, it was found that the promoters led by Tarun Reddy Ambati, Managing Director, had displayed high involvement in the project as this being their primary source of income. Reddy is a first generation entrepreneur with good academic background and he has got knowledge of the manufacturing activity and run the activity with the help of skilled staff. He had the support of his family in his efforts, including infusion of owner’s capital whenever the company required it.
It was found that the promoters first approached APSFC for financial support as they lacked awareness about finance sources like banks and NBFCs. APSFC had released the term loan over a period of time as per the requirement proposed in the project report. There was no delay from the primary lender’s end. The total amount of `6.2 million was released in 6 months. Apart from loans from family members, the promoter had not obtained any other funding.
REASONS FOR SICKNESS
TIHCL identified the following reasons for the sickness of the unit:
Del ay i n machiner y installation
The unit at its initial stages could not find a appropriate buyers who can pay in 60 days and because of this the receivables were delayed and the payments to the term lender were also delayed
Natural calamity had damaged factory shed
There was some delay in production as one unit of the machinery was not sufficient High cost of borrowed funds and penal interest charged by APSFC.
TIHCL evolved a resolution package, which comprised Critical Amount Funding (CAF) to regularize the term loan account. Besides, APSFC charged 17% interest p.a. and provides 2% as interest rebate for prompt and timely payment. It levies 2% as penal interest for irregularities in the repayment. With TIHCL’s CAF loan, this interest burden will be reduced by 2-4% p.a. on term loan of `6.2 million. High interest rate is one of the reasons for the stress experienced by the unit.
TIHCL sent the recommendations to the Industries Department, Government of Telangana for priority release of sanctioned incentives. And with its CAF loan, the account got regularized and APSFC did not take any legal action.
At 90% of the capacity the unit has employed 21 workers and their families comprising 105 individuals are dependent on this enterprise.
After TIHCL intervention, the unit is running at its maximum capacity. The entrepreneur’s loan repayment is on time.
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