Please see article case to reEEspoOnse to this finance QUEstiOon:

Assume you are a consultant brought in to assess the company:

• ??In your opinion, what operational and financial charges need to be made to improve SealTek's operational and financial performance? Why?

Response structure: take these under consideration when you writEE your response:

• You have only 2 paAgeEs for analysis and recommendations of your response. That means you need to integrate words with numbers (drawn from the tables, and others you might create), graphics, tables- whatever you need to communicate your recommendations and why as coherently and effectively as possible.
• As a consultant you need to be very clear to Giri Saha why whatever changes are needed
• The numbers generated in the worksheets (that follow your writeup) should be used to support and define your recommendations.
• Do not use bullet points; you need to represent complEEte and coherent ideas and sentences
• Do not cut and past the tables attached ( i can read those for myself)
• Do not say things like "see Table 3..." Site specific numbers to make your point
• Structure your writeups, looks for linkages between concepts, and edit your writing.
• Writing and communication quality matters.

SEALTEK FITTINGS (INDIA)1 We understand that no business can survive without earning profits. But, it is not our end goal. Our main goal is to create a value in the market. We know it better that the change is the only constant in the nature. So, we seek and constantly strive to upgrade our qualities and processes. We relentlessly chase for improvement in quality and service. It's because customer is our sole focus. Our values are not merely set of words, they are woven into our DNA. We live with them always. It helps us to take right decisions. That's the reason people trust us. Mission Statement, SealTek Fittings Ltd. The 2008-2009 recession accompanying the global credit crisis had been tough on many companies, SealTek Fittings llndia) included. Giri Saha's father Raj had started SealTek in 1988 with a partner, Sidharth Farah. Farah had always been a silent partner, a partner in principle, given that most of the fittings and valves product line was based on patents and licenses held by Farah. In 1995 Raj Saha had bought Farah out, and the business had been a Saha family business ever since. Giri had replaced his father at the helm in 2004. The business had both changed and grown under Giri, hitting a peak in 2008 before falling in 2009 with the crisis. Although the business had recovered in 2010, hitting 1,940.3 million Indian rupee (INR) in sales and INR 72.2 million in profit, he was now thinking of selling the business. His Mumbai-based bankers had been highly critical of the way the company was performing. Profits were not what they should be, and it had been four years since the company had launched a new product. Giri Saha wanted to reassess the business's fundamentals and decide upon a course of action. Control Valves, Fittings, and Assemblies People don't want to buy a quarter-inch drill. They want a quarter-inch hole! Theodore Levitt Many industries are composed of process plants, plants that in turn consist of hundreds of control loops. These loops, typically conducting fluids {hydraulic} or gases (pneumatic), must be capable of reacting to changing conditions in order to alter or manage the flow. The loops are constructed from tubing that is connected and controlled via valves and fittings. The manufacture of these valves and fittings was SealTek's business. But that business had been changing. SealTek under Raj Saha had made its mark in the manufacture of directional valves, valves and fittings sold to control valve assembly producers. But when Giri Saha took over the business, he saw opportunity in moving the firm up the value chain, from being a part supplier to a system producer. As Giri reminded his staff weekly, "our customers don't want parts, they want solutions." Although this could increase sales and reachI positioning SealTek closer to end customers, it also required the company to invest and support a variety of new business activities. This expansion of SealTek's role required it to add two additional product lines, components and instrumentation, to its two traditional business lines, hydraulic systems and pneumatic systems. Components 1 Copyright 2016 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professors Michael H. Mcffett and Lena Booth for the purpose of classroom discussion only, and not to indicate either effective or ineffective management. The case is based on a private company, and all names and values have been changed to preserve confidentiality. included the multitude of pieces and parts needed for control valve assemblies, most of which were considered commodities. They yielded low prices, law margins, and high inventory. The second additional product line, instrumentation, was expected to be a profit driver in the near future. It consisted of a variety of electrical and digital devices for system assemblies, linking the various control valves and fittings. Sales had been robust and margins promising. At this time, however, pneumatic and hydraulic systems still accounted for more than 80% of global sales. Components was proving problematic. For control valve assemblies they were considered a \"necessary evil.' Every customer wanted the company to offer all of the components and pieces, but no one really wanted to pay for them. Giri Saha had tried to rationalize the company's offerings with little success. Customers had been unhappy and threatened to stop purchases in SealTek's main product lines. Giri had decided to continue to offer all components to keep customers happy. But, as financial results continued to show, they offered little in terms of profitability. He explained it to his management team [and his father) that it was "an investment in our customers.\"His bankers referred to it as the innovator's dilemma. One of the biggest changes in directional valves over the past 30 years had been in certification. ISO 9000, the International Organization for Standardization's requirements for quality and standardization, had been helpful in sales and hurtful in costs. And certification obligations did not stop there. A variety of others including pressure equipment directives (PED} in the European Union, similar requirements by the American Society of Mechanical Engineers (ASME), and most recently the certification requirements for atmospheres explosibles (ATEX} in the European Union, all added to equipment and compliance costs. The growth in international specifications and quality requirements had placed enormous demands on the company. w r SealTek's Profitability SealTek was profitable. As illustrated by Exhibit 1, the company had made a profit over the past six years, and that included 2009 when many firms in many markets suffered losses with the global financial crisis. Sales in 2010 had returned to the growth path seen prior to 2009, but protability, for example return on sales, was still below levels seen in prior years. Exhibit 1. SealTek Fittings, Sales and Profitabin Sablll) Rmnll Tel-m u- m m m m m t.- ow m 0" m x p- m m u- m m m One area of specic concern was cost - direct cost (cost of sales). Giri Saha was notoriously lean when it came to overhead expenses, general and administration expenses, G&A, which he believed caused many promising companies to fail. And he would not allow SealTek to join that list, particularly in these tougher times. He worked continuallyto keep both overhead and G&A below 10% of sales. The cause of cost increases had been his two major direct costs, labor and materials. Labor costs were at the top of the list. Labor costs had been rising very rapidly for all lndian manufacturers, and sealTek was no different. What the company had avoided, at least until recently, was high turnover. Although many companies in and around Mumbai had suffered losses upwards of 25% quarter-to-quarter from workers moving across the street for 100 more rupee, SealTek had been raising Wages ahead of the curve to try and preempt losses. Although retention had not yet been a problem, the rising wage costs were. The second source of cost increases, material costs, was a reflection of the run-up in all types of metal and tubing prices in recent years. Copper costs alone had risen dramatically, but almost every component, including steel and tungsten, had seen continual price increases. Markets, Margins, and Competitiveness Giri Saha had recently completed a review of the company sales with the help of his staff. Giri believed in having a strategic plan in place to be used both as a barometer and a benchmark before evaluating operational performance and financial needs for future success. Sales in both hydraulic and pneumatic systems were growing in two major country/industry segments: shipbuilding in South Korea, Singapore, and Indonesia; and heavy equipment manufacturing in India and China. Although both segments had recovered in 2010, their margins were not yet what they had been. Components had the lowest margin of all product lines. The segment faced many low-price generic brands, forcing SealTek to price its products very competitively; components were sold worldwide, with India being the fastest growth market. Sales in Europe and North America declined as the global recession prompted many customers in these regions to switch to generic replacements. The instrumentation application product line was primarily digitally interfaced connectors used in combination with control Valve assemblies. The recovery in pneumatic and hydraulic system sales had prompted growth in this line as well. The bad news was that increased labor costs had lowered gross and operating margins in 2010. Appendix 3 provides a breakdown of sales by region, and Appendix 4 a decomposition of product sales, costs, and inventories. Revenue Growth Giri therefore began where he always began, decomposing the revenue growth of the company into three categories: customer churn, core market growth, and new markets growth. C Customer churn was the state of current market share and sales. This segment combined the sales growth each year that arose from sales taken from competitors with that lost to competitors. Depending on the company, this was often the focus of leadership, if it considered itself operating in a mature market, or totally ignored, if the company's culture and strategy focused on innovative growth 0 Core market growth was the growth in annual sales that arose from the company's market positioning its existing share of a growing market. In other words, it was the growth in sales that arose from getting the same sized slice of a growing pie. Corporate leadership often viewed this category passively; regardless of whether market growth was good or bad, it was viewed as out of the company's hands. Giri was not sure that was really the case. 0 New products/markets growth was the growth in annual sales achieved through entering adjacent markets and new markets through new products or services. Sales in these new markets could be achieved through either organic growth (expansion from within) or inorganic growth (via acquisition). After reviewing SealTek's sales growth over recent years, Giri Saha ouickly concluded that there was trouble in all three categories. SealTek's target customers had never really changed: heavy equipment and machinery, shipbuilding, and industrial products and projects of all kinds. Core market growth, particularly the North American and European markets, had been flat at best. Must ofthat was a result of both declining manufacturing activity in the big industrial countries and the 2009 recession. The shipbuilding industry in South Korea, Singapore, and Indonesia, had been a source of growth for a number of years. The shipbuilding needs of the global oil and gas industry had been behind much of it, as the offshore industry had grown. And the industry had seemingly only blinked with the 2009 global downturn. oil and gas prices had remained relatively high in 2009 and into 2010, so the market was seemingly solid. Outside of shipbuilding, SealTek was faced with a highly dispersed industrial market, with many niche players and a few dominant companies (particularly in North America and Europe). These were typically specialty sales, small machine part manufacturers and electronic component integrators. The only way to reach these customers was through sales reps who carried a lot of different company products, and increasingly, Internet sales. Customer churn had been high, and pricing and distribution difficult. It was domestic sales, India sales, behind much of recent sales growth. Although traditional residential and commercial construction did not drive much demand for SealTek's high-end mechanized systems, there were enough infrastructure projects underway to make India the growth engine. New markets and products was a more fundamental problem. SealTek was a technology company, yet it had been unable to launch a truly new competitive product in the last three years. The company just did not have the capital to develop a commercially competitive product now. Pricmg Exhibit 1. 1'qu fifth: mite Sire [nonction 'Ihc problem which Giri 139154 with was wing me Area-agents price Flee-l not: were priced in us. Yet g M (my cut-.5 markets, and the relative 1007 mm frzo new 7 rupee againsl lhe dollar 2008 mm is :3 nuts -,IJ'/- hilly \"PWHHS my Of 2009 mm mu 372.36 -l.l6% 'ibulols. For example the 2010 \".09\" 4557 3;\"; 535% nal valve was introduced 2011 13.000 '6 60 "17 4.00% R 13.000. The average mum for 2007 was [NR i the doliar price as i distributors in North America was: arse-x. Spot nte (mmvso) _ lNRHzO/USD Another part of the problem which Girl continually struggled with was price. SealTek's products were priced in U.S. dollars in most markets, and the relative volatility of the rupee against the dollar had been periodically upsetting many of its regional distributors. For example the SAE#5 directional valve was introduced in 2007 at INR 18,000. The average exchange rate for 2007 was INR 41.20/USD, so the dollar price as retailed through distributors in North America was: The reception for the product had been good and initial sales strong. Over the following years as the rupee weakened against the dollar its price as sold in target export markets fell in dollar terms (see Exhibit 2). This was both good and bad. It was somewhat good for sales, as the increasing duality of many of the products combined With an ever- cheaper price helped sales volumes. But price was not the sole driver of sales, technical specifications were. The bad news was that the sales reps in most of these markets earned their sales commissions on U.S. dollar revenues (or euros), and although volumes were rising, revenues were not. Girl had kept a close eye on the debate but had held the line on the price. Investment and Debt ciri Saha knew the company needed to broaden and deepen its instrumentation portfolio if it was to really reap the benefits of expanding into control valve assemblies. The problem was capital; Giri estimated that he need to invest INR 200 million over a series of years. He had started the process, investing INR 56 million in 2009 and another INR 72.5 million in 2010. But it had come at a cost-a growing debt load. The company had acquired much of its long-term debt back in 2006 and 2007 at a moderate cost of 9.75%. It had used short-term debt sparingly over the years, but the capital outlays in 2009 and 2010 had to be funded, and short-term debt had been the only choice. But short-term debt costs during the crisis had skyrocketed, averaging 16.50% in 2009, dropping slightly to 14.80% in 2010. (This was unusual because shortsterm debt was typically cheaper than long term debt. But at this time, SealTek did not have access to longsterm debt.) W Iii/WHEN sum was (mouth EthKJ. (Jonquil)!!! for selek Flunrhls Ont-l7 Cut-Iv Gull-y Way am A a c bays sacs Qllstzlding 3 u 40 Days lavattoiy u 35 as Dlys Payables 36 34 35 gal Strum" new Total Assets cm 0.21 1115 an/ uvestati an'li 031 o 35 029 Debt/Equity us M9 1151 hdul @1155 most Mig'u mm to w. my. mm on sales \"2% 7.7% 12.1% Giri, like his bankers, was concerned about debt service and its drag on his cash flows. That said, short-term debt was typically used by manufacturers for working capital financing. When Giri had asked his bankers for some benchmarks on business performance including working Capital management, they had only been able to provide three comparable Companies, labeled A, B, and C in Exhibit 3. If nothing else, all three companies were making much higher returns on capital than sealrek had been able to generate recently. Regardless, Giri's bankers set his borrowing limit at INR 200 million. Raj Saha's Rules What Giri Saha knew about linancial management he had learned from his father Rai Saha's Six Rules. He had seriously tried to follow them, most of the time, when he agreed with them in principle. Rule #1:\"Collect your receivables, its your money.\" Giri's father had continually reminded him that when you made a sale the business was not over. You needed to deliver the product, support the customer, and collect your money. Not necessarily in that order. Rule #2: "Bankers are only interested in your ability to repay their loans - with interest." The senior SealTek had always emphasized what a bad thing debt was, but Giri struggled with this. The company needed to borrow if it were to make the investments and purchases needed for growth Rule #3: "The worst noise to hear on the shop floor is silence.\" This is the slogan that the senior SealTek had always used to emphasize that the company needed to maintain adequate inventories at all times to avoid stockout shutdowns or delays. Rule #4: "Accounting is a practice; cash ilow is real." Needless to say, the elder SealTek had never held the accounting profession in high esteem. He also believed that the only way you could tell how well a business was doing was to look closely at its cash flows. Rule #5: "We are a private business. We don't care what others think." Giri's father constantly reminded him that they had a strong advantage over publicly traded companies. They could run the business as they chose, and weren't accountable for other investor attitudes toward what margins were adequate or what actions had to be taken to create accounting results. Rule #6: "Growth is overrated. What counts is sustaining the family.\" Not surprisingly, under senior Saha's leadership the company had grown very slowly for many years. Girl had succeeded in growing it at a more rapid rate, but his father thought he was sacrilicing the sustainability of the business. Giri Saha's bankers had heard the six rules many times over the years, and they were not great fans of some of the principles. But Girl had been talking to two different sets of bankers, those that provided SealTek its debt, and a couple of investment banking houses on the prospects of selling the company. The latter had focused on something which wasn't in Rai's Rules or on the bankers list, return on capital. The |>bankers said SealTek needed to get return an capital up over 20% to make the company attractive. But when Giri had discussed it with his father, his father had simply remarked "I used to get 3% on my savings, and averaged 10% on my stocks. since the company is more risky than a stock, lor us, then 15% should be the minimum.\" SealTek's Prospects Girl Saha had been educated in engineering, not business. His father had made sure that Giri knew the technology, and had introduced his son to the business on the job and over time. But Girl knew enough about his business to know that something needed to change, and quickly. He did not know if its current financial position would allow it to stay independent much longer. Altematively, Giri could search out a new owner, a larger firm with a wider portfolio and the experience of integrating and growing smaller businesses. lam/mu WWW" let-el- sacs owss ugh. ones-arm m Matilda. a sold; an unease Bum-WWW Won mmnm Bin-1h ('4) has @ 25% Net atone M1711 11th ml 2m 1.51.7 1,551 was 3: m 125,: 1527 ms 171% 505 my 144,-; 2M 2411 130% 605 111.: 97% so nu Appendix 1. Senll'ek mugs, Staten-t um HIIICS (my. d' Dec-h 31) 1.560: L160] 002 25 m 1231 1511 113.7 73% 532 555 5.5% 34 a 2.0: 1 3% 52 15.7 I w. 60.0 443 2010 134M 1.05m 3.6 249% 11a: tan 205.9 10 m 07.0 1419 7.4% 47.7 50% 241 3 79; do 122 10/17/2020 SEALTEK FITTINGS (INDIA) 1 10/17/2020 SEALTEK FITTINGS (INDIA) 1 Appendix 2. SealTek Fittings, Balance Sheets (millions of INR, year ending December 31) Appendix 4. Sales and Costs by Product Line (millions of INR, year ending December 31) Assets 2008 2009 2010 Cash 2008 61.2 26.4 17.4 Accounts Receivable 201.2 198.8 292.9 Product Line Sales Cost of Sales In ven tory Inventory 192.3 183.5 247.8 Pneumatic Systems 707.4 470.2 76.3 Prepaid Expenses 34.2 38.7 32.6 Hydraulic Systems 844.7 542.2 85.2 Current Assets 488.9 447.4 590.7 Components 223.4 179.8 21.6 Instrumen tation 86.2 62.9 9.2 Gross fixed assets 4372 493.4 565.9 Total 1,861.7 1,255.1 192.3 Accum depreciation 98.6 156.8 218.8 Net fixed assets 338.6 336.6 347.1 2009 Product Line Sales Cost of Sales Inventor y Total Assets 8275 784.0 937.9 Pneumatic Systems 570.3 450.2 74.3 Hydraulic Systems 725.9 498.1 81.9 Liabilities & Net Worth 2008 2009 2010e Components 183.6 149.5 179 Accounts Payable 107.0 105.3 140.5 Instrumen tation 80.5 62.3 9.4 Accrued expenses 43.7 35.8 44.2 Total 1,560.3 ,160.1 83.5 Short-term debt 119.5 137.3 242.7 Current Liabilities 270.3 278.3 427 4 2010 Long-term debt Product Line Sales 120.6 Inventor y 127.8 113.2 Cost of Sales Pneumatic Systems 670.8 540.6 96.3 Equity 429.4 385.1 397.3 Hydraulic Systems 950.1 657.3 114.2 Liabilities & Net Worth 827 5 784.0 937.9 Components 219.2 179.5 24.2 Instrumentation 100.2 79.3 13.1 Total 1,940.3 1,456.7 247.8 Appendix 3. Sales Decomposition by Region Sales by Region (millions of INR) 2008 2009 2010 Appendix 5. Indian Rupee to U.S. Dollar Spot Exchange Rate India 484.0 530.5 776.1 Europe 279.3 187.2 194.0 Indian rupee (INR) = 1.0 U.S. dollar (USD) Monthly, January 2000 -December 2010 Americas 446.8 312.1 310.4 53 Singapore/Indonesia/Korea 502 7 405.7 523.9 China 148.9 124.8 135.8 51 Global sales, net 1,861.7 1,560.3 1,940.3 Sales by Region (percent) 2008 2009 2010 India 26% 34% 40% Europe 15% 12% 10% Americas 24% 20% 16% Singapore/Indonesia/Korea 27% 26% 27% China 8% 8% 7% Global sales, net 100% 100% 100% Average Exchange Rate 2008 2009 2010 INR / EUR (rupees per euro) 63.54 67.27 60.59 INR / USD (rupees per US dollar) 43.43 48.34 45.67 INR / SGD (rupees per Singapore dollar) 30.65 33.24 33.53 INR/ CNY (rupees per Chinese yuan) 6.2587 7.0762 6.7470