NOTE TO MY DEAR STUDENTS

1. The case describes the situation of a company. Please note that the situation is purely hypothetical and
used for instructional purposes. Any resemblance is purely incidental.
2. For best understanding and results, the Students are advised to develop the complete model on their
own. However, owing to the time constraint, you would be given some pre-filled templates at various
stages of our journey. The students should be able to get from one template level to another in the
time prescribed in the class.
3. Students should read the case carefully till the end to know the various assignments based on the
case.
4. Students should check their model at each stage with the next level of the template to verify their
approach.
5. You are expected to make it more interactive by asking your doubts and queries on a regular basis.
6. Students should raise questions and challenge the approach.
7. This case study is prepared as I know, as well as you all know that most of you won’t be reading
annual reports fully at least initially, however it is possible to read this Case which is a 10 pager and
covers brief excerpts that shall help in Building a Financial Model. That’s the prime reason this case is
prepared and presented to give you an Initial Understanding of how to proceed w.r.t creating a
Financial Model.
8. You are requested and expected to read Annual reports as well as Sector Reports and start preparing
for the Project. I shall be helping and guiding you w.r.t the same based on certain Company related
discussions at my end.
9. This case is for educational purposes and is proprietary content of myself (Alias Roronoa Zoro) and
shall not be shared without approval. This case has been applied to copyrights.

The purpose of this document is purely educational in nature. The idea is to

help someone kick-start their analysis of this sector/company. However,
this is not to be construed as a recommendation of any sort on the
company or its stock. All information has been sourced from publicly
available data such as annual reports and news items and the veracity of
the sources has not been independently established. Kindly use your
judgement while analysing further.
 FINANCIAL MODELING CASE STUDY: FMCG SECTOR

Looking through the window of his office, “God Usopp Kun” was wondering how quickly time has
passed by. The day was pleasant with bright sunshine outside. With a mug of coffee in his hand, he
was looking at the day to day activities in the premises of One Piece Consumer Products Limited
(“OCPL”).
God Usopp Kun had recently completed his MBA from Wharton Business School when his father
died in late 2015. Since then he had taken control of OCPL, a company started by his father
Legendary Yasopp (“Part of Akagami Shanks Team”).
OCPL, a popular name in eastern coast of the US, operates in fast moving consumer products
segments. It manufactures and sells three products:
1. Soaps in packets of 100 gms
2. Hair colour in bottles of 250 ml
3. Liquid Detergents in the bottles of 500 ml

Since the time God Usopp Kun took control of the operations at OCPL, the company has grown leaps
and bounds. The volumes sold across each of the three categories of products have shown significant
growth over the last five years.

Exhibit 1: Volumes sold over FY16 - FY20

Sales Volume (in ’00 FY16A FY17A FY18A FY19A FY20A

Units)

Soaps (100 gms packet) 187,500 215,625 240,000 285,000 337,500

Hair Colour (250 ml bottle) 281,250 300,000 315,938 333,750 348,188

Detergents (500 ml bottle) 131,250 150,000 163,125 173,438 182,813

Besides, OCPL has also managed to consistently increase the sale prices of its products primarily
because of lack of competition in the areas where it has achieved good marketability.
Exhibit 2: Sales Price Movement

Sales Price (INR / Unit) FY16A FY17A FY18A FY19A FY20A

Soaps (100 gms packet) 3.2 3.6 4.0 4.3 4.5

Hair Colour(250 ml bottle) 7.5 8.0 8.8 9.2 9.5

Detergents (500 ml bottle) 10.0 11.2 12.5 13.5 14.5

However, God Usopp Kun knows that things are no longer going to be as comfortable as they are
right now. Especially, in a situation when a leading listed player in the consumer products area has
announced plans to expand in the geographies where OCPL operates. Given the changing dynamics
of the business, God Usopp Kun was thinking through the potential course of actions he can take to
counter the increasing competition.
As a first step he decided to take stock of the situation. He asked the chartered account for the
historical financial statements of the company.
Exhibit 3: Historical P&L Statement of OCPL

P&L Statement (INR Million) FY16A FY17A FY18A FY19A FY20A

Revenues 402 486 578 664 748

Costs

Raw Material Cost 128 163 184 205 232

Manpower, Salary & Bonus Cost 51 58 72 86 94

Power Cost 2 2 3 4 4

Packaging Cost 9 10 12 14 16

Advertisement Cost 20 41 42 44 46

Commission 20 24 29 33 37

Maintenance Cost 1 1 1 1 1

Insurance Premium 2 2 2 2 2

EBITDA 169 184 233 274 315

Depreciation 100 100 105 110 110

EBIT 69 84 128 164 205

Interest Expense 60 59 56 53 50

PBT 9 25 72 112 156

Tax Rate 34.0%

Taxes 3 9 25 38 53

PAT 6 17 48 74 103
 Usage of Funds

Fixed Assets

FY16A FY17A FY18A FY19A FY20A

Gross Block 1,000 1,000 1,050 1,100 1,100

Accumulated depreciation 100 200 305 415 525

Net Block 900 800 745 685 575

WIP - - - - -

Investments 37 50 60 80 100

Current Assets (Excluding Cash)

Inventory 36 60 65 69 72

Account Receivables 33 52 55 60 51

Loans & Advances 10 14 15 20 16

Total Current Assets 79 126 135 149 139

Current Liabilities & Provisions

Provisions for Employees Fund 10 6 8 9 9

Advances From Customers 5 8 12 4 7

Commission Payable 4 4 10 6 6

Insurance Premium Payable 2 2 2 2 2

Accounts Payable 16 18 25 22 25

Total Current Liabilities & Provisions 36 38 57 43 49

Net Current Assets (Working 43 88 78 107 89

Capital)

Cash & Bank Balances 76 110 187 248 433

Total Usage of Funds 1,056 1,048 1,070 1,119 1,197

While the past performance looked phenomenal, he knew that he along-with his management team
has to constantly improve and think ahead of the curve lest OCPL should be eaten by the
competition. He was well aware of the fact that however good his team might be, past performances
may not be sustained in future unless he does plan well in advance. He quickly summoned his Sales
and Marketing team to seek their inputs on the future sale price points for the various products
OCPL manufactures.
Excerpts from the discussion he had with his Sales & Marketing team:
“….Soap segment has seen a high growth phase so far, but due to enhanced penetration in the
rural markets, this segment will see a tapering growth rate from the expected 15% in FY22 to 12%
in five years time. Due to lack of fashion consciousness in the villages, hair color segment will, at
the best, see a CAGR of 0.5% less than historical CAGR over a five period time frame. ..Liquid
detergents have gained popularity in the rural markets and will continue to display a growth rate
of 5% - 6% over the same time frame, very much in line with its growth rate last year…”
“….While OCPL has so far controlled the sale prices of these products at its will, the same may not
happen in future. It will be almost impossible to increase the prices of soaps and detergents for the
next two years and even beyond that, the increase will be limited to 2% to 3%. Hair color segment
still has a possibility of seeing a price CAGR growth rate same at historical levels…”
God Usopp Kun quickly realized that in the competitive world, revenue growth alone may not fetch
the desired shareholders’ value creation. He quickly turned his attention to the key cost elements in
the P&L statement. He knew that raw material was the key constituent of the total cost base. There
were just four categories of raw materials required for the operations of OCPL.

Exhibit 5: Raw materials requirement of key products of OCPL

Raw Materials volume 100 gms Soap 250 ml Hair Colour 500 ml Detergent
requirement (ml)

Acid 105 255 505

Specialty chemicals 10 12 25

Ordinary chemicals 5 8 15

Perfumes 10 5 12

Acids were the single primary key raw material in terms of quantum of consumption. Specialty
chemicals were added to achieve the desired color and perfumes were added for fragrance. God
Usopp Kun quickly noticed the raw materials price trend from the exhibit overleaf provided to him
by the Materials Department
Exhibit 6: Raw Materials Price Movement

Raw Materials prices FY16A FY17A FY18A FY19A FY20A

(INR/ml)

Acid .77 .88 .92 .95 1.00

Specialty Chemicals .37 .45 .50 .53 .55

Ordinary Chemicals .17 .25 .28 .30 .35

Perfumes .58 .65 .70 .75 .80

He quickly invited Mr. Roronoa Zoro, Head of Materials Department for a discussion on the prices of
the raw materials.
Excerpts from the discussion he had with Mr. Roronoa Zoro
“…For the acids, OCPL has entered into a long term contract with the leading supplier in the
region. Under the terms of the contract, acids will see a price escalation of 5% over the next five
years. For specialty chemicals, he has multiple vendors and due to high bargaining power OCPL
enjoys with the suppliers, the price rise in this segment will be restricted to 5%. Ordinary chemicals
will display a price rise of 15% to 16% over the same time horizon while perfumes will display the
historical CAGR in terms of its price growth…Power cost will display a growth rate in the range of
10% – 11%...”
As soon as the discussion was concluded and Mr. Roronoa Zoro left the room; a very commanding
and authoritative female voice shouted at him, “You never seem to keep track of time. It’s lunch
time, where have you been?”
From the authority and power in the voice, it was evident that the voice was of none other than Miss
Kaya, God Usopp Kun’s wife. Miss Kaya was God Usopp Kun’s childhood girlfriend. The two got
married in early 2008 when God Usopp Kun took control of OCPL and Miss Kaya of God Usopp Kun.
This time Miss Kaya’s entry was perfect in time. Miss Kaya, besides being God Usopp Kun’s wife, was
also the HR head of OCPL. Over lunch, God Usopp Kun figured out that his HR department had been
quite cautious in growing the manpower in the organization.

Exhibit 7:Manpower in OCPL

Manpower (In ’00 Nos.) FY16A FY17A FY18A FY19A FY20A

Manufacturing 28 30 35 40 40

Marketing 5 5 7 8 9

Corporate 2 2 2 3 3
Miss Kaya told him that the manpower count will remain the same for this year while she had
budgeted a headcount increase of 5% beyond. She also provided information on the monthly salary
figures of the employees in different categories.
Exhibit 8: Average Monthly Salary

Monthly Salary (INR/Employee) FY16A FY17A FY18A FY19A FY20A

Manufacturing 1000 1050 1100 1110 1170

Marketing 1500 1600 1700 1750 1800

Corporate 1600 1650 1720 1780 1820

Bonus (% of salary) 10% 12% 12% 12% 15%

She also indicated that the employees have not received any salary hike this year; however she had
budgeted for a 5% hike year on year for the next five years. Firm will continue to pay 15% of the
salary as bonus in the years to come unless something unforeseen happens.
Post lunch, it was time for a quick walk and he was joined by none other than Mr. Sanji San, the guy
behind the operations of OCPL. God Usopp Kun was aware that the packaging of the end products of
OCPL was outsourced to another firm through a long term contract. Mr. Sanji San clarified that
packaging cost will see a meager rise of 2% after remaining constant this year. Besides, he promised
to mail God Usopp Kun the historical packaging rates.
At times, our mailbox is so flooded with mails that we simply keep staring at it without knowing
which ones to open first. But God Usopp Kun was quite clear in his mind and he clicked open
the mail from Mr. Sanji San as soon as he reached his office after the walk.

Exhibit 9: Packaging Cost Per Unit

Packaging Cost (INR/Unit) FY16A FY17A FY18A FY19A FY20A

Soaps (100 gms packet) .10 .11 .12 .13 .13

Hair Colour (250 ml bottle) .15 .16 .18 .19 .19

Detergents (500 ml bottle) .20 .22 .23 .25 .25

God Usopp Kun knew that OCPL had not been an aggressive advertiser so far. However, in order to
increase penetration of the products and reach wider markets, advertisement spend had to increase.
He has increased the budgetary allocation of advertising spend to 10% of sales this year and he
decided to raise it to ~ 14% gradually over the next few years. Besides to prevent the retailers and
salesman from partnering with any new player in the area, he knew he would have to gradually
increase their commission to 7% from the current levels of 5%.
Having been through key items of revenues and growth, it was now time to interact with Corporate
Finance department about the future capital expenditure and their funding plans. The firm had
raised a debt of INR 500 Mn at an interest rate of 12% in FY16 to be repaid in 20 equal installments
beginning FY17. The capex plans for the firm was as follows
 Exhibit 10: Capital expenditure plans INR FY21P FY22P FY23P FY24P FY25P
(in Million)

Capital Expenditure 500 100 - - -

The firm depreciated all capex items using a straight line method over a period of 10 years. Knowing
the cash balance available with OCPL and good results so far in FY21, he realized that no additional
external funding will be required in order to carry out the planned expansion.
Having assimilated all the information now, God Usopp Kun was now wondering how to make use of
them to figure out the cash position of the company, its financial health and projected performance.
He was also thinking of a possible way of arriving at the valuation of the company his father had
created. He knew that he had a tough task in his hand. He was reminded of an investment banker,
Monkey D Luffy, his batchmate from his MBA College. However, he did not want to employ his
services as he feared the magnitude of the fees. However, he called him to seek information on
trading multiples of the listed companies in this sector and also an update on the recent M&A or PE
transactions that might have happened.
Gone are the days when investment bankers used to be working 100 hours a week. Thanks to the
recent downturn, bankers now enjoy some free evenings with their loved ones. However, greed for
fees never leaves them. Within minutes of the call, God Usopp Kun saw a mail from Monkey D Luffy
who had concisely compiled the data he was looking for.

Exhibit 11: Trading multiples of the listed companies in FMCG sector

EV/Sales EV/EBITDA P/E β D/E

Com EV M Cap FY20 FY21 FY22 FY20 FY21 FY22 FY2 FY21 FY22
pany 0

A 1,169 989 2.0 1.8 1.6 8.2 7.3 6.7 18.2 15.3 13.5 1.4 2.0

B 1,321 1,254 2.1 1.9 1.5 9.4 8.5 7.1 19.5 16.4 12.4 1.5 1.9

C 1,456 1,342 2.5 2.3 1.9 9.6 8.8 7.5 20.1 17.2 14.3 1.2 1.5

D 1,289 1,432 2.0 1.8 1.5 8.1 7.7 6.9 19.1 16.6 12.9 1.3 1.3

E 987 1,100 1.9 1.4 1.2 7.5 6.9 6.1 15.1 14.1 12.4 1.0 1.4
Exhibit 12: Transaction Multiples
Transaction Multiples
Recent Transactions in the Year EV/Sales EV/EBITDA P/E % Stake
same sector/ Industry

Co. X acquired Co. Y 2018 2.20 11.20 21.30 100%

PE firm F invested in Co. Z 2019 1.20 6.80 12.30 10%

Co. A acquired Co. B 2019 2.50 10.00 18.00 51%

PE investment in Co. G 2020 1.30 6.20 10.10 5%

Co. P acquired Co. Q 2020 2.40 12.00 18.10 26%

God Usopp Kun has a voluminous and strenuous task at hand to determine the value of his firm.
However, he had been quick to break a big problem into a series of smaller problems to facilitate his
task.
Assignment 1
As a first step, prepare cash flow statements from the historical P&L and Balance sheet statements
for the period of FY16 to FY20.

Assignment 2
Conduct ratio analysis based on financial statements available so far and examine the trends in them.
Besides, observe the growth rates and key trends in the revenue and cost items. Quickly examine if
revenue and cost build up are accurate.

Assignment 3
Identify key drivers of the revenue and cost. Prepare projected financial statements based on the
historical trends and the inputs gathered from various departments. Conduct what-if scenario and
check the sensitivity of the business model on various variables.

Assignment 4
Based on projected financial statements, build a DCF model to arrive at an approximate equity value
of the firm. Examine this valuation with respect to the trading multiples and transaction multiples in
the industry.