FCL has realized that its existing markets mainly centred in the western province is shrinking and possible new opportunities are coming up with government development plans in various parts of the country, the construction of Highways and in the port city.
The company has identified of late that there many HR issues leading to the resignation of some key employees and worker unrest in projects and in the office due to loss of earnings created by a multitude of reasons such as Covid 19 restrictions, project losses, insufficient margins etc…
The company has no proper mechanism to issue job descriptions and conducting performance appraisals of the employees to determine the incentives and annual increments. Further, the 2 directors are contemplating whether or not they should device a new performance matrix to link the financial rewards to the performance and wants to get an expert opinion as to how this can be practically done.
There are some concerns of the expenses at sites and excess material consumption at sites. The directors believe that the lack of control over expenses and poor monitoring mechanisms cost the company a lot and as the main reason for the drop in profitability than expected. The company’s cash flow has been threatened.
The performance of various divisions and individuals have not been assessed properly and it was revealed that some of the employees have not been evaluated for as long as 3 years. The employees however has not made a complaint on the same and it seemed that they are quite settled and enjoying the culture and working practices of the company.
Macro Economic Issues
The company is of late facing severe issues to open Letter of Credit facilities for the import materials due to the lack of foreign exchange in the market and the banks have been insisting the company to open LCs for 180 days instead of usual 60 days. This is negatively affecting the raw material availability and the project completion deadlines.
Certain foreign investors who were keen to invest in the country before is now showing a lack of intent and interest due to covid 19 challenges and the country’s poor credit rating of ccc+
The recent money printing to the tune of Rs. 218Bn per day by the government is causing a fear of raw material prices increasing which can negatively affect the profit margins further. The customers of the company too can find it difficult to meet debt obligations since their businesses too are affected.
The exchange rate of dollar which currently stands at Rs. 200 / 1$ is expected to depreciate by 5% over a period of 12 months.
The vaccination drive against Covid 19 started late in Sri Lanka and as a result it’s expected that the herd immunity will be delayed until October 2021. The country is facing a fresh challenge of the Indian Variant of Covid and many believe that the worst is yet to come.
Acquisition of FCL
A listed company in a similar industry has indicated that it’s willing to make an acquisition bid to acquire FCL as a part of acquirer’s expansion strategy.
The following financial details are provided for the acquirer. (Listed Company)
- Dividend pay out ratio – 5%
- EPS – 70, (Issued at Rs. 100 per share)
- MPS – Rs. 115
- Debt / Equity – 25:75
- Beta – 1.2
- Current treasury bill rate – 6.7%
- Market premium – 7&
Nalinda, One of the directors feels that if an offer comes at the right price, it will be worth selling his shares given the challenging market conditions and the financial situations of its customers.
You are required to
To address the Directors of FCL in the form of a report, focusing on the specific areas mentioned under each of the following headings from 01 to 07. (An ‘executive summary’ is not required)
01. Identify using a suitable matrix the product / market development strategies FCL can pursue and discuss the factors that need to be addressed and the risks that need to be controlled under each strategy (10 marks)