Action Resea

Research Project-Strategic
Strategic Change
Management
gement – Experiential Learning

Kumar Krishna

Kumar Krishna k.krshn@gmail.com

Table of Contents:
1. Problem Statement: ...................................................................................................................................................... 3
2. Problem Description: .................................................................................................................................................... 3
3. Application of Concepts: ............................................................................................................................................... 3
3.1 Action Research Model: .......................................................................................................................................... 3
4. Background Information: .............................................................................................................................................. 3
5. Answers to questions in phase 1 to 5 as provided in concept note: ............................................................................ 3
5.1 Phase I- Problem Identification:.............................................................................................................................. 3
5.2 Phase II-Plan of Action: ........................................................................................................................................... 4
5.3 Phase III – Data Collection: ..................................................................................................................................... 4
5.4 Phase IV - Analysis of Data: ..................................................................................................................................... 4
5.4.1: Scenario 1:....................................................................................................................................................... 4
5.4.2: Scenario 2:....................................................................................................................................................... 5
5.4.3: Scenario3: ....................................................................................................................................................... 5
5.4.4: Scenario4: ....................................................................................................................................................... 6
5.5 Phase V – Plan for Future Action: ........................................................................................................................... 6
6. Bibliography / Source Acknowledgements: .................................................................................................................. 6

Kumar Krishna k.krshn@gmail.com

1. Problem Statement:
Financial Crisis of Steel Plant

2. Problem Description:
The organization has applied loan to receive working capital for Unit 2. However due to various internal and external
factors the bank has rejected the proposal. Inaddition, therepayment and Interest payment of Term Loan has already
started in 2014making Unit 2 as an extra liability for the organization. They will have to work on their finance model
to overcome the extra financial burden.

3. Application of Concepts:
3.1 Action Research Model:
Action Research model focuses on planned change as a cyclical process in which initial research about the
organization will provides information with which subsequent action can be taken. The results of the action are
assessed to provide further information to guide further action. This is often considered synonymous with
Organization Development.

4. Background Information:
GEPL is a secondary steel manufacturing company which manufactures Mild Steel Rod (TMT) & Mild Steel Billets. The
company has 2 production facilities

1. Re-Rolling Mill – Unit 1

2. Induction Furnace – Unit 2

The company availed following finance facility from leading PSB

1. Working Capital for Unit 1
2. Term Loan for Unit 2

In 2012, the company wanted to set up new production facility with a total project setup cost of Rs. 6 crores for
which it was sanctioned Rs. 4 crores from Bank and 2 crores was invested from promoters. The company was
financially sound and did not require cash credit (working capital) to start commercial production of Unit 2.

The plant setup was over in 2013 and the company had to start commercial production of Unit 2 but due to global
slowdown and cheap imports from other countries, the steel sector in India faced a major loss. Therefore, company
applied for fresh working capital to run unit 2 but the same was rejected by the bank. In addition, Repayment of
Term Loan started from 2014.

5. Answers to questions in phase 1 to 5 as provided in concept note:

5.1 Phase I- Problem Identification:

Company is not able to generate enough cash to repay the debt liabilities because it has not able to start commercial
production of unit 2 due to lack of working capital.
Kumar Krishna k.krshn@gmail.com
Reasons why bank is not financing:
1. Requirement of Cash Credit facility was not mention in project report.
2. Global Recession especially in steel sector
3. Most of the NPAs of PSB are in Steel & Power Sector

5.2 Phase II-Plan of Action:

 Capital infusion in the company from external sources.
 The company can start production in unit 2 and increase production in unit 1. This will in turn increase the
income and help the company to repay debts and increase shareholder’s income.
 Existing practices--rotational shifts for higher production rate.
 TIMELINE- 6 months- 8 months

5.3 Phase III – Data Collection:

Total Exposure:
1. Cash Credit of Rs. 5.5 Crore for unit 1
2. Term Loan of Rs. 4 Crore for unit 2.

Monthly payment to be done to bank:

1. Interest of Cash Credit of Rs. 560000
2. EMI of Term Loan Rs. 1170000

At production of 1500 MT per month (Current Scenario) Amount

Raw Material Cost per MT 35000
Cost of production per MT(this cost includes all fixed & variable cost) 5500
Total Cost per MT 40500

Average Selling price per MT 41500

Profit per MT 1000
Therefore, Profit per month 1500000
Net Profit after Interest &Instalment payment -230000

Monthly income is about Rs. 1500000 out of which Rs. 1730000 is to be paid to bank. Therefore, the company is
making loss of Rs. 230000 per month.

To ensure multiple perspectives we took help of the internal consultant who has been working in the company for a
long time.

5.4 Phase IV - Analysis of Data:

With the analysis of the financial statement, we have come up withfour different scenarios.

5.4.1: Scenario 1:
 Double the production of unit 1 to 3000MT.
 To double the production extra working capital of 60000000 is required.

Kumar Krishna k.krshn@gmail.com

Resources Amount
Raw Material Cost per MT 35000
Cost of production per MT(this cost includes
all fixed & variable cost) 4500
Total Cost per MT 39500

Average Selling price per MT 41000

Profit per MT 1500
Therefore, Profit per month 4500000
Net Profit after Interest &Instalment payment 2770000

With the scenario 1 we are having a profit of 27, 70,000 rupees per month after paying Interest & Instalment of the
bank.

5.4.2: Scenario 2:
 Dispose Unit 2 and repay the bank & Run Unit 1 at capacity of 1500 MT.

Resources Amount

Market Value of Unit 2 (to be sold as scrap) 25000000

New Liability Term Loan Unit 2 7100000

 Total Interest &Instalment per month to be paid to bank

1 Interest on CC for unit 1 560000

2 EMI for Term Loan of Unit 2 240000
Total 800000
Profit per month from Unit 1 1500000
Net Profit 700000

With the scenario 2 we generate aprofit of INR 7, 00,000 rupees per month.

5.4.3: Scenario3:
 Start Commercial production of unit 2 and run unit 1 at 1500 MT per month. To start unit 2 working capital
of 60000000 is required.
 Unit 2 has to be run on full capacity of 2200 MT per month as due to technical limitation it has to run 24x7.

Resources Amount

Expected Profit per MT from unit 2 800

Total Profit per month 1760000
Profit from Unit 1 1500000
Total Profit per month 3260000
Net Profit per month 1530000
Kumar Krishna k.krshn@gmail.com
With the scenario 3 we are having a profit of 15, 30,000 rupees per month.

5.4.4: Scenario4:
 Start Commercial production of unit 2 and run unit 1 at 3000 MT per month. Additional working capital of
120000000 is required.

Resources Amount
Profit from Unit 2 1760000
Profit from Unit 1 4500000
Total profit per month 6260000
Net Profit per month 4530000

With the scenario 3 we are having a profit of 45, 30,000 rupees per month.

5.5 PhaseV – Plan for Future Action:

Steel sector in India was going through a rough phase. However, due to increase in infrastructure expenditure, by
Government and policy changes like MIP in steel, Implementation of GST, Steel sector is reviving. Considering the
present scenario even when financial institutes give less importance to steel industry, finding an investor is a tough
task. Only people who are into this sector understand the complexity involved in it.

Stakes of the company can be sold to a new investor to raise a fresh capital of at least Rs. 6 crores. Scenario 1 is the
best option and will be the first step. Once things go as per plan, the company will start generating enough cash and
they will be able to start commercial production from unit 2.

If we are not able to rope in new investments then scenario 2 is the best option where we can sell dead asset to
repay the debt and continue operating unit 1.

6. Bibliography / Source Acknowledgements:

1. Organization Development & Change Thomas G. Cummings, Christopher G. Worley 10th Edition, CENGAGE
Learning.
2. Annual Audit report of the company.

Kumar Krishna k.krshn@gmail.com