Financial Accounting Assignment II

Ayush India Ltd. revenue models

Vishwak.S
Roll N.o 40319
Question 1
Build an optimistic and pessimistic profitability scenario based on relevant assumptions.

Pessimistic Model

Assumption We are assuming that a profitability model is being calculated for Ayush India Ltd.
With the industry being expected to grow by 20.6% by 2020 according to IBEF forecasts
(https://www.ibef.org/download/Consumer-Durables-June-2017.pd f), we can therefore assume
that the company will grow by 4.29%, 6.44% and 8.59% YoY which is on par with the industry
standards. We can also conversely assume that the company will not take any more additional
steps to ensure that it grows more than the forecasted growth rate. The revenue model will be
calculated solely 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)
Gross Profit 2,437.50 2,487.58 2,589.69 2,670.64
Salaries (227.50) (338.95) (469.02) (626.82)
PBITDA
Depreciation (50.00) (54.00) (60.25) (66.75)
PBIT
Interest Paid - (4.80) (6.40) (8.00)
PBT
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
Total Taxable Earnings 2,184.00 2,132.43 2,107.82 2,039.07

Tax (873.60) (852.97) (843.13) (815.63)

Earnings after taxes (In Crore) 1,310.40 1,279.46 1,264.69 1,223.44
 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)
Gross Profit 2,437.50 2,623.69 2,951.06 3,307.11
Salaries (227.50) (357.50) (534.46) (776.20)
PBITDA
Depreciation (50.00) (54.00) (60.25) (66.75)
PBIT
Interest Paid - (4.80) (6.40) (8.00)
PBT
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
Total Taxable Earnings 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 (In Crore) 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 Revenue Stream

4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
2017 2018 2019 2020
Dividend Income 10 20 25 30
Rent from vacant commercial land 20 25 30 40
Revenue 3250 3389.53 3607.82 3917.61
 Optimistic Model Revenue Stream
5200
5000
4800
4600
4400
4200
4000
3800
3600
3400
3200
2017 2018 2019 2020
Dividend Income 10 20 25 30
Rent from vacant commercial land 20 25 30 40
Revenue 3250 3575 4111.25 4851.28

Pessimistic Model Expense Stream

1000
800
600
400
200
0

2017 2018 2019 2020

Optimistic Model Expense Stream

1200
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

Statement of Financial Position Current Projected

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
Receivables 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

Statement of Financial Position Current Projected

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
Receivables 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