Mr. Kishore is the managing partner of the construction company - Tesla Constructions. The market outlook and

Fantastic news! We've Found the answer you've been seeking!

Question:

Mr. Kishore is the managing partner of the construction company - Tesla Constructions. The market outlook and the financial condition of the company are making him increasingly worried. In the last two years, the decrease in government spending on infrastructure has severely affected the company's balance sheet. Also, the disruptions due to the pandemic have caused the existing projects to delay, which increased the costs significantly. With almost no income in 2020, the company struggled in financing the machinery and paying the staff. Due to this, the company has reduced its workforce by almost 40%. Now, Mr. Kishore is in a precarious situation, and he is confused about how to proceed with the cash reserves to take the company forward.

Mr. Kishore has started this business about two decades ago with almost nothing in his hands and has turned into a reputed company with an annual turnover of INR 500 million. Tesla's business is mainly from state and central government projects of roads and buildings. As the company specializes in the construction of bitumen roads, most of its projects are of roads. The company operates mainly in three districts of Andhra Pradesh. As this industry is equipment intensive, the company has significant assets in machinery, which are financed through loans. The profit margin in this industry is about 8% of the total revenues.

Over the last few years, the company's turnover increased gradually; however, the company's profit margins have gone down to 6% due to the increase in operational costs. The cost of raw materials and labor cost have gone up by 20%. Also, the new regulations of the state government have forced the company to invest in new bitumen manufacturing plants of about INR 70 million. These new plants have been mostly idle, and the asset utilization has been low. So, this investment has put additional stress on the company's liquidity to meet the operational needs.

The company is unsure of the strategy it should follow to come out of this crisis. So, Mr. Kishore approaches a consultant i.e. you to address the company’s financial problems. Please help him address the following issues.

1. What should be the company's next steps to increase its profits? Should he take up new projects from the government? If yes, what are the risks involved? How can he mitigate those risks?

2. How should he choose to invest company's current cash reserves? Should he continue to expand his current business, or should he try to diversify his business? (E.g., taking up projects of construction of buildings) Why or why not?