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Financial Accounting Assignment II

Ayush India Ltd. revenue models


Question 1
Build an optimistic and pessimistic profitability scenario based on relevant
assumptions.

Pessimistic Model

Assumption We are assuming that the profitability model is being calculated for Ayush India
Ltd. The industry is expected to grow by only 20.6% by 2020 as per IBEF forecasts
(https://www.ibef.org/download/Consumer-Durables-June-2017.pdf). We will assume that the
company will grow by 4.29%, 6.44% and 8.59% YoY, on par with the industry standards. We can
also assume that the company will not take additional steps to increase more that the
forecasted growth rate. The revenue model will be calculated on this basis.

Particulars % of Revenue
Year 2017 2018 2019 2020
Revenue (YoY increment) - 4.29 6.44 8.59
Material 10.00 10.00 10.00 12.00
Operating Costs 15.00 16.61 18.22 19.83
Salaries 7.00 10.00 13.00 16.00

Particulars 2017 (Cr) 2018 (Cr) 2019 (Cr) 2020 (Cr)


Revenue 3,250.00 3,389.53 3,607.82 3,917.61
Material -325 -338.95 -360.78 -470.11
Operating Costs -487.5 -563 -657.34 -776.86
Operating Profit 2,437.50 2,487.58 2,589.69 2,670.64
Salaries (227.50) (338.95) (469.02) (626.82)
Depreciation (50.00) (54.00) (60.25) (66.75)
Interest Paid - (4.80) (6.40) (8.00)
Preference share dividend (6.00) (2.40) (1.20) -
Rent from vacant commercial land 20.00 25.00 30.00 40.00
Dividend Income 10.00 20.00 25.00 30.00
Earnings before interest and taxes 2,184.00 2,132.43 2,107.82 2,039.07
Tax (873.60) (852.97) (843.13) (815.63)
Earnings after taxes 1,310.40 1,279.46 1,264.69 1,223.44
Optimistic Model

Assumption We are assuming that the profitability model is being calculated for Ayush India
Ltd. The industry is expected to grow by 10% as per SMERA ratings report and CEAMA
forecasts.(https://www.smera.in/impact-consumer-durables)
(http://economictimes.indiatimes.com/industry/cons-products/durables/indian-consumer-
durables-market-to-reach-20-6-bn-by-2020/articleshow/48204183.cms). We will assume that
the company will grow by 10%, 15% and 18% YoY. We can also assume that the company will
continue to grow at the same rate as the forecasted growth rate. The revenue model will be
calculated on this basis.

Particulars % of Revenue
Year 2017 2018 2019 2020
Revenue (YoY increment) - 10.00 15.00 18.00
Material 10.00 10.00 10.00 12.00
Operating Costs 15.00 16.61 18.22 19.83
Salaries 7.00 10.00 13.00 16.00

Particulars 2017 (Cr) 2018 (Cr) 2019 (Cr) 2020 (Cr)


Revenue 3,250.00 3,575.00 4,111.25 4,851.28
Material (325.00) (357.50) (411.13) (582.15)
Operating Costs (487.50) (593.81) (749.07) (962.01)
Operating Profit 2,437.50 2,623.69 2,951.06 3,307.11
Salaries (227.50) (357.50) (534.46) (776.20)
Depreciation (50.00) (54.00) (60.25) (66.75)
Interest Paid - (4.80) (6.40) (8.00)
Preference share dividend (6.00) (2.40) (1.20) -
Rent from vacant commercial land 20.00 25.00 30.00 40.00
Dividend Income 10.00 20.00 25.00 30.00
Earnings before interest and taxes 2,184.00 2,249.99 2,403.74 2,526.16
Tax (873.60) (900.00) (961.50) (1,010.46)
Earnings after taxes 1,310.40 1,350.00 1,442.25 1,515.70
Question 2
Compute Earnings per Share in each scenario and comment
Since the number of shares issued is not stated in the question, we will assume that
the number of equity shares issued by the company is 1,00,00,000. Earnings per share
can be calculated by dividing the net profit by the number of equity shares issued.

EPS = Earnings after taxes/Number of shares


Earnings per share Year
2017 2018 2019 2020
Pessimistic Model 1,310.40 1,279.46 1,264.69 1,223.44
Optimistic Model 1,310.40 1,350.00 1,442.25 1,515.70

Comment:
In the pessimistic model, we can see that the earnings per share is decreasing over the years,
this is due to the fact that the companys profits are diminishing over the years. If the
company continues to grow as per the industry average, while maintaining the same level of
costs, the profits of the firm will decrease. This will have an impact on the earnings per share.

In the optimistic model, the earnings per share increase gradually over time as the profits of
the firm are also increasing. The company will have to maintain a minimum growth rate of 10%
on an annual basis to meet increasing costs and at the same time increase profits and the
earnings per share.

Question 3
Graphical representation of the revenue and cost breakups under different scenarios
Pessimistic Model Expense Stream

1000
800
600
400
200
0

2017 2018 2019 2020


Question 4
Identify the most sensitive cost element to the company

Since the cost of materials absorbs the highest percentage of revenues (more than 15% of the
total revenues), it is the most cost sensitive element for the company. Any increase or decrease
in the cost of materials will have a significant impact on the profits of the firm.

Question 5
Redraft the balance sheet based on the optimistic and pessimistic scenarios

Assumptions: It is assumed that all the expenses and income were settled in cash. Hence the
net profit directly results in an increase in cash.

Redrafted balance sheet - Pessimistic model


Current Projected
Statement of Financial Position
2017 2018 2019 2020
EQUITY AND LIABILITIES
Shareholders funds
Equity 800.00 800.00 800.00 800.00
Net Profits 1,310.40 1,279.46 1,264.69 1,223.44
12% Preference Capital 50.00 20.00 10.00 -
Non Current Liabilities
16% Convertible Debentures - 30.00 40.00 50.00
Current Liabilities
Short term payables 20.00 35.00 40.00 50.00
Bank overdraft 40.00 30.00 60.00 80.00
TOTAL 2,220.40 2,194.46 2,214.69 2,203.44
ASSETS
Non Current Assets
Fixed Assets 500.00 580.00 625.00 710.00
Less: Depreciation (50.00) (54.00) (60.25) (66.75)
Investments 5.00 8.00 12.00 13.00
Current Assets
Recievables 70.00 95.00 145.00 185.00
Inventory 325.00 220.00 153.00 55.00
Cash & cash equivalent 1,370.40 1,345.46 1,339.94 1,307.19
TOTAL 2,220.40 2,194.46 2,214.69 2,203.44

Redrafted balance sheet - Optimistic model


Current Projected
Statement of Financial Position
2017 2018 2019 2020
EQUITY AND LIABILITIES
Shareholders funds
Equity 800.00 800.00 800.00 800.00
Net Profits 1,310.40 1,350.00 1,442.25 1,515.70
12% Preference Capital 50.00 20.00 10.00 -
Non Current Liabilities
16% Convertible Debentures - 30.00 40.00 50.00
Current Liabilities
Short term payables 20.00 35.00 40.00 50.00
Bank overdraft 40.00 30.00 60.00 80.00
TOTAL 2,220.40 2,265.00 2,392.25 2,495.70
ASSETS
Non Current Assets
Fixed Assets 500.00 580.00 625.00 710.00
Less: Depreciation (50.00) (54.00) (60.25) (66.75)
Investments 5.00 8.00 12.00 13.00
Current Assets
Recievables 70.00 95.00 145.00 185.00
Inventory 325.00 220.00 153.00 55.00
Cash & cash equivalent 1,370.40 1,416.00 1,517.50 1,599.45
TOTAL 2,220.40 2,265.00 2,392.25 2,495.70

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