Knowledge in Finance and Accounting

Relevance of Contribution Margin Analysis

Contribution Margin analysis - No longer relevant? SCM_the new paradigm

Target Costing and how to use it

TARGET COSTING AND HOW TO USE IT BY MICHIHARU SAKURAI

Measure Costs Right and Make the Right Decisions

Measure Costs Right and Make the Right Decisions Use Activity based costing to guide corporate strategy

Time Driven Activity Based Costing

Time Driven Activity Based Costing by Robert S Kaplan and Steven R Anderson

Life Cycle Costing and Concept of EVC

A Note on "Life Cycle Costing" and the Concept of Economic Value to the Customer

Effective long term cost reduction

Effective long-term cost reduction: A strategic perspective by Michael D Shields and S Mark Young

Capital budgeting practices in Indian companies

Capital budgeting practices in Indian companies Roopali Batra a,*, Satish Verma b a Department of Management, I.K. Gujral Punjab Technical University, Kapurthala, Punjab, India b RBI Chair, Centre for Research in Rural and Industrial Development (CRRID), Chandigarh, India Received 21 July 2014; revised 22 June 2015; accepted 13 February 2017; available online 1 March 2017

Radio One - Case Solution

Radio One - Case Solution Strategic Finance Management

American Barrick Case Solution

American Barrick Case Solution Strategic Finance Management

Berkshire Case Solution

Berkshire Case Solution Strategic Finance Management

RCom Strategy - Financial Perspective

Q 1. What is the business strategy that RCom should adopt? Short term strategy: Since RCom had a negative net income in 2017, and negative cash flows due to high interest obligations, the first and most important strategy that RCom should adopt is to reduce the debt on its books. Reducing debt would help it to at least survive in the short term because interest obligations would be reduced. It could adopt the following strategies of reducing debt in the short term: a) Reliance Communications can hive off the wireless telephony business and merge it with Aircel which will reduce its debt by around Rs 14,000 Cr. b) Sale of majority stake in the telecom tower business to Canadian Private Equity Fund Brookfield. This will reduce the debt by around 11,000 Cr. RCOM will retain minority interest in the tower business with a stake of approximately 49% c) RCOM can also sell stake in its international undersea cable arm Global Cloud Exchange (GCX). It is predicted to reduce the debt by Rs 1,000 Cr. d) Waiver of interest and principal payments till September 2017 of loans of about $1 billion (Rs 6,300 crore) by the following Chinese lenders: (i) China Development bank (ii) Industrial and Commercial Bank of China (iii) Export and Import Bank of China All these steps are expected to bring down its debt by 60% The company’s credit rating has been reduced to Ca by Moody’s. Ca rating in India has an approximately 5.5% spread over 10 year government bond yield. Therefore, Cost of debt = 6.44% + 5.5%= 11.94% After reducing their debt, we assume that their credit rating would increase to Baa3. Baa3 rating in India has a 2.54% spread over 10 government bond yield. New Cost of debt= 6.44%+ 2.54%= 8.98% Existing Debt ( in Rs Cr) 44,585 Interest expense @ 11.94% (in Rs Cr) 5,323 D/E 7.70 Debt after reduction (in Rs Cr) 17,834 Interest expense @ 8.98% (in Rs Cr) 1601 New D/E 3.08 The calculations have been shown in the excel All these strategies are expected to bring change in financial statements of Q4 as deals are expected to be completed by the end of Q3 or starting of Q4 Long term strategy: 1. Saving on Capital Expenditure – As RCom already has a deal in place with Reliance Jio to share 1,00,000 towers, it would end up saving on taking debt to build towers which other companies would have to do to match Jio’s onslaught. Cost of 1 tower = Rs 70,00,000 Cost of 1,00,000 towers (in Rs Cr)= 70,000 Saving in costs (in Rs Cr) = 70,000 2. Cost saving and increase in revenue due to merger with Aircel- RCom currently has validity till 2022 inn 800 MHz spectrum. Due to merger with excel, the validity is going to extend till 2033. This will lead to cost savings RCom wouldn’t have to spend to renew spectrum license. Total savings= Rs 4000 Cr Due to this merger, the combined user base of new entity would be around 180 million. At an ARPU of 157, this entity would produce an additional revenue of 2826 crore 3. Growth in subscriber base or ARPU through additional schemes- RCom is looking at adapting a three-pronged approach to protect and grow their subscriber base. RCom’s ARPU of Rs 157 is on par with that of the market leader, Bharti Airtel while it is higher than that of Vodafone and Idea. Therefore, it is imperative for RCom to focus on subscriber growth to boost overall profitability. Therefore, RCom can adopt the following: ●          Unlimited Voice RCom is proposing a Rs 149 pack with unlimited voice over IP (VoIP) calling and 300 MB 4G data targeting their predominant voice customers. ●          Discounted Tariff RCom is proposing a Rs 19 pack with 20 paise/min tariffs and 500 MB data that is targeting the rural subscribers and migrants ●          Aggressive 4G Data RCom is proposing a Rs 99 pack that provides 1GB 4G data and a voice tariff of 20 paise/min targeting the urban subscribers and the youth Calculations have been shown in excel     Q2. How should it restructure its capital to survive? Reliance communication has a debt of Rs 44,585 Crore in its books, leading to a Debt/Equity ratio of 7.70, against an industry average of 3.26. Due to such a huge amount of interest obligations and falling revenue, Reliance Communications has defaulted on its loan servicing obligations with more than 10 local banks. These banks have also put the telecom operator in “either SMA1 or SMA2 category. Moody’s has downgraded its rating to Ca level. Lenders have given a moratorium till December 2017. If it is not able to pay loans by then, lenders will exercise their right to convert the debt. It can reduce its debt by doing the following the things mentioned in Question 1, which will reduce its cost of debt and D/E ratio. Based on Current Capital Structure: Debt (in Rs Cr.) 44,585.60 Equity (in Rs Cr.) 5,786.88 Beta 1.63 Cost of equity 14.20% Cost of debt (post tax) 7.76% WACC 8.50%       D/E of RCOM with its competitors: RCOM 7.70 Bharti Airtel 0.61 Idea 1.55 Tata Teleservices 3.20 Industry average 3.26 Based on New Capital Structure: Debt (in Rs Cr.) 17,834.24 Equity (in Rs Cr.) 5,786.88 Beta 1.63 Cost of equity 14.20% Cost of debt (post tax) 5.84% WACC 7.89% RCOM’s new Debt/ Equity after reducing its debt: 3.08 If everything goes according to plan, Reliance Communication will be able to pay off 27,000 CR of its debt, which will improve its credit rating, share price and also improve its ability to refinance. Calculations have been shown in excel

Strategic Finance Management - Sample Co. Analysis

Britannia ·         Market leader in bakery and biscuit business ·         Unorganized sector – 29% ·         Tax rate – 8-9% for <Rs 100/kg; 24% for > Rs 100/kg pre-GST ·         Now post GST, it is 18%; Britannia will benefit ·         Biscuit is organized, to enter with unorganized, entering into bakery biz with JVs – plan to enter into unorganized ·         Considering premium biscuit biz to tap into higher income streams ·         ITC o   15% market share in biscuits o   More rural (with parle) ·         Britannia is into urban ·         Strategies to tackle ITC and Parle o   Britannia is strengthening its distribution to focus on rural o   Improved mkting to penetrate hindi speaking area o   Planning to import wheat as import duty decreased o   First company to tie up with e-commerce (Amazon) to sell Good Day o   Investments in R&D and capacity expansion o   Setting up in Oman, Dubai and Mauritius with soft loans from govt of Oman ·         High PE not sustainable ·         Low debt National Building Construction Corporation (NBCC) ·         PSU ; Navratna status -> invest upto 1000 crores without asking govt ·         Three biz : PMC, Real Estate Development and EPC ·         PMC – 85% of revenues ·         Order book of Rs 36000 Cr ·         Major client – Central Government, PSUs ·         They get orders by nomination process without competitive bidding ·         How does it secure its strategic advantage o   Do international projects for other countries o   2% of country’s population -> Govt project ; They have monopoly o   They should get involved in the smart city project o   They have expertise in green buildings which they can leverage on to enter into this segment ·         Is govt ownership drag on reinvestment plan? o   Yes as they are restricted by the 1000 cr plan o   Payout ratio -> 20% ·         What is its financial strategy? o   Debt free company o   Asset light model Hero With hindsight, its business strategy to severe its relationship with Honda was good or bad.  Justify using ROC and ROE. ·         Hero wanted tech expertise and Honda wanted a partner to enter India; Hence JV ·         Hero’s JV clause prevented them from entering into markets where Honda was already there. Hence, they severed ·         Although they expanded into 35 countries, sales have been flat ·         Their OM has also remained the same ·         ROE has reduced from 60% to 45%; ROCE also reduced. This shows it was a bad decision to drop JV ·         Honda had 13% market share at that time; it is now 26%; Hero had 50%; now dropped to 42% ·         Hero wanted to increase supply of components from Japan; royalty increased ·         Honda was not willing to share key tech with Hero ·         Scope of JV was limited to mfg as new product development is restricted to Honda Should it continue with high dividend policy? ·         Debt free company ·         Payout ratio – 50% ·         Before breakup, they had 30% ·         At time of breakup, they had 109% ·         Post breakup, 50% ·         No it should not; Market share sliding; Honda going up; They have to reinvest into R&D and market expansion… Hence 50% payout is way too high Maruti Suzuki 1.      Explain its business strategy. ·         Strategy to move from low cost car into an aspiring brand; ·         Visible by Nexa brand category ·         Will its growth be sustainable once EVs kick in at 2030 as Maruti doesn’t speak about EVs ·         Suzuki have collaborated with Toyota to bring EVs and battery technology; Suzuki wants EV tech; Toyota will piggyback on Maruti in India 2.      Explain its financial strategy. ·         Low debt and quick repayment due to high CFs ·         Payout ratio has been 30% and has been increasing which is high compared to other players ·         Uses its excess funds by investing in MFs and it believes in high cash from retained earnings to invest in capex ·         Higher ROE and ROCE; Yen denominated ROCE and ROE to figure out since lot of it goes back to Japan Unlike other MNCs why has it pursued a low dividend policy? ·         To reinvest in capex ·         Comparing with FMCG MNCs which are inelastic, auto is elastic; Also, auto is cyclical. They don’t want to increase and then decrease owing to market conditions Sudarshan Chemicals 1.      Explain its business and financial strategy. ·         48% from exports ·         Plans to go further global ·         Building capacity to meet demand due to housing for all ·         Market dominated by inorganic pigments; 20% is only organic ·         Sudharsan -> Organic (niche segment) ·         It is expected to go to 40% by 2020 ·         Organic is more environmentally friendly; ·         Biz strategy o   Direct Market Access instead of traditional selling to mfgrs (used to sell to Asian paints; now selling on its one) o   Going global o   Going to more specialized pigments (it has higher margins) o   Inhouse captive plant in Roha to reduce power cost by 50% o   Low cost of procurement at China by setting up a subsidiary thereby reducing operating costs ·         Financial strategy: o   Reducing its D/E ratio o   For expansion plan, it plans to finance 75% by debt o   Payout -25 to 40% o   ECBs in euros which is cheaper 2.      Does its valuation justify its business strategy and should its premium valuation be demolished? ·         Expanding capacity abroad ·         PE around 23 and is overvalued ·         Overvaluation justified owing to expansion and env friendly biz Bajaj Finance ·         Subsidiary of Bajaj Finserv ·         45% of biz comes from consumer finance ·         Short term financing – 3 to 12 months ·         Low NPA 1.      Should it become a bank? ·         Advantage of bank o   Low cost CASA deposits ·         Bajaj Finance is a deposit taking NBFC ·         NBFCs can’t take demand deposits ; CASA cost is low ·         Disadvantage of becoming a bank o   CRR requirements not there in NBFCs while it is there in banks o   SLR increases if you shift from NBFC to bank o   Mandates you to have 25% rural branches which are unbanked §  Increases investments o   Priority sector lending norms are not applicable for NBFCs ·         IDFC, which was a NBFC before, after becoming a bank, it’s net interest income go down by 20% Explain its business and financial strategy? ·         Biz strategy: o   Diversified portfolio of lending §  Risk in one sector diversified o   Growing consumer finance segment ·         Financial strategy: o   Reduced cost of funds through diversified borrowings o   High net interest margins DMart   ·         EDLP ·         Low debt to equity as compared to its peer (0.7) ·         ROE is 21% way higher than peers ·         High asset turnover ratio ·         Owns stores; Asset heavy model; No rent which is around 5-10% of sales 1.      Would it go Walmart way? ·         Walmart stores are getting closed. Will it follow for D Mart? 2.      Explain its business and financial strategy? Business strategy ·         Buy low; sell cheap ·         High inventory turnover ·         Low payment period to vendors to get bargaining power with suppliers to get a lower price ·         Owns stores; Asset heavy model; No rent which is around 5-10% of sales ·         Selective expansion ·         Low sales and marketing expenses Financial strategy ·         Low debt ·         Revenue per sqft is high ·         Asset heavy business ·         Negative overall CF o   Positive CFO o   Negative CFI 3.      How does it effectively deal with competition from e-market? ·         Venturing into ecommerce Amazon ·         Inventory based and market place ·         Amazon -> Hybrid model ·         They have their own retail called Cloudtail ·         As per regulations, not more than 50% from a single vendor What is the business strategy of the company? ·         Cost leadership ·         Amazon reduced commission charges to sellers What is its financial strategy? ·         Amazon US -> Amazon Eurasia -> Amazon APAC -> Amazon Seller Services ·         Amazon US no profits from 1997 to 2003 How is Amazon India going to be profitable? ·         Through Amazon Webservices although e-commerce is loss making Major cost headers: ·         Promotion charges ·         Amazon fulfilment transportation DHFL – Diwan Housing Finance Ltd ·         Housing credit has grown ·         Housing for all was a favorable factor ·         Growing urbanization Explain business strategy of DHFL.  Is it supported by its financial strategy? Biz strategy: ·         Grown through acquisitions and wanted to venture into different business streams ; complementary business (Asset Management, Life Insurance, Avanse, etc) ·         Sold off one business and received in compulsory convertible debenture so as to get equity later in that firm ·         Focus on tier 2 and tier 3 cities ; Lower income segment ·         Acquisitions to expand geographical reach and client acquisition    ·         Aiming to become a financial conglomerate Finance strategy: ·         Initially bank borrowing ·         Moved to QIPs and NCDs to reduce cost of funds ·         Tied up with a consortium of banks to jack up loan book growth (tie-ups with commissions) ICICI Prudential ·         Less than 1.5% world’s total insurance premium value ·         Insurance industry wants to hike it to 5% ·         Market dominated by LIC ·         Growth drivers: o   Demographic dividend o   Insurable population growth ·         Business strategy: o   Expand their product offerings o   85% of product offerings are ULIPs o   Reduced grievance ratio (lesser than industry) ·         Financial strategy: o   Persistency Ratio – Amount of business that a company can retain by renewed o   Highest persistency ratio (for 13 months) among pvt sector o   IRDA wants to cap expense ratio to prevent companies from increasing expense ratio and passing it on §  Divide all expenses/net premium to get expense ratio o    Expense ratio increased marginally despite steady growth HDFC 1.      Explain its business strategy to raise additional Tier 1 capital from the Eurodollar market. o   They raised money to enter into risky segments (agriculture loans and small ticket loans) o   Tier-1 capital -> Core equity of the bank o   Tier-2 capital -> Banks o   Basel 3 – 11.5% Tier-1 capital to be held from FY19 o   HDFC feels the need to increase Tier-1 capital due to expected rise in NPA o   CoCo contingent convertible bond -> converted if capital requirement falls below standards o   CoCo bonds are risky and no takers in domestic markets o   HDFC is hence going to Euro dollar market to get them o   High yield acts as an impetus for foreign investors and cost of raising is low for HDFC o   Bond issued by HDFC at lowest coupon rate due to lowest NPAs o   Bond issued by HDFC at lowest coupon rate due to lowest NPAs