Hindustan Consumers Private Limited (A case study

for Financial Modeling and Valuation)

Hindustan Consumers Private Limited (HCPL), is a five-year-old company founded and

promoted by Mohit Singh.
It is a leading producer in FMCG Products and manufactures 3 Products: Soap, Hair Color
and Detergents. Mohit Singh is planning to take the HCPL public by selling some of the
shares to public. Once the equity of HCPL is listed it will help the company in raising capital
from the markets as and when required in the future.
Mohit Singh called Ajit Khanna, Vice president of Kaveri Capital a Merchant Banking Firm,
to help him in estimating the worth of his shares.
Ajit Khanna asked his team to collect all the relevant data from the respective departments
and teams of HCPL. After some days, when the team has finished their data collection, they
started structuring their thought process, plotting key data points and started structuring a
financial model and estimating worth of the shares.
Ajit Khanna quickly scanned through some of the sales data which marketing department had
shared. (Data is in the model) and held a meeting with the Company sales and marketing
team to seek their inputs on the future sales price points for the various products. After a
series of questions and cross questions they broadly agreed on following parameters:
 Soap Segment volume has seen a higher growth due to rural penetration and hence
will see a tapering growth of 15% in FY24 to 12% in five years’ time.
 Hair Color segment volume will be at a growth rate less than 0.5% of the historical
growth rate over a five years’ period time due to lack of fashion consciousness in the
villages.
 Liquid detergents will continue to display a growth rate of 5%-6% in volumes due to
gaining popularity in the rural market.
 Price growth for soap and detergent have to taper down from 5% to 2%-3% range in
the coming years. Hair color segment still has a possibility of seeing a price at
historical level only.
Ajit Khanna then quickly turned his attention and scanned the cost elements in the P&L
Statements and found that raw material was the key constituent of the total cost base. He
further found that 4 categories of raw materials required for the production of these products
and they are: Acid, Speciality Chemicals, Ordinary Chemicals, and Perfumes. Once he
identified the raw material he invited Head of materials department for a discussion on the
prices of raw materials. The Excerpts of the discussion are as follows:
 For the Acids, as per the long-term agreement with the supplier it will see a price
escalation of 5% for the first 2 years and 4% thereafter.
 Since there is lot of Bargaining power in specialty chemicals the price rise in this
segment will be restricted to 5%.
 Ordinary chemicals will have a price rise equal to average of last 3 years growth.
  Perfumes will have a historical 5 years average price growth rate
Once it is done, Ajit Khanna had turned his attention towards second most important
component of cost i.e. Employee Cost and planned to meet the Head of HR department. On
discussion HR told to Ajit Khanna that the count of employees will remain same for this year
while budgeted for headcount increase of 5% beyond. Further HR indicated that the
employees will not receive any salary hike this year however has budgeted for 8% hike YoY
beyond. And the company will continue to pay 15% of the salary as bonus in the years to
come.
Post Lunch, Ajit Khanna met the Operations head of HCPL and asked about the power cost
and consumption of the plant. After discussion with operations head they came with the
conclusion of power consumption in the year FY23:
 Power Purchase tariff – Rs. 5.25 per unit
 Power Consumption in production process – 1,75,782 kwh.
 Power consumption per unit of Soap, Hair color, and Detergents stand at X, 2X and
4X level respectively.
 Power consumption in other offices and buildings – 19,800 kwh (Will not change
with factory activity)
Ajit Khanna researched a industry magazine on Discoms, proposing the highest YoY tariff
hike of 8%-10%. Further Packaging cost will see a meager rise of 2% after remaining
constant this year. (Refer packaging cost detail in the model)
Mohit Singh knows currently they are not spending much on advertising, however they are
aware that to increase the penetration of the products, advertisement spend needs to increase.
He made the budgetary allocation of 8% for advertising spend in the next year of sales and
decided to raise it to 12% gradually over the next few years. Besides advertising cost, to
prevent salesman from partnering with new player in the area, Company would have to
gradually increase the commission cost as well to 7% from current level of 5%. Other cost
such as Maintenance, Insurance and Admin & Misc. could be estimated as equal to average
of last 3 years (% of sales)
Subsequently Ajit interacted with the Corporate Finance department about the Working
capital and Balance Sheet drivers, Future Capital Expenditure and their funding plans. (Refer
Balance Sheet Drivers and Proposed Capital Expenditure plan in the model)
The Company had loan from State Bank of India. Ajit Khanna collected a copy of term sheet
issued by the Bank for understanding of the funding.
As on date HCPL has 30 lakhs of equity shares outstanding. Equity infusion is the need of
the day and indicated a cut per share price of Rs. 25 roughly for fresh equity infusion.
Having provided all the information to the team, Ajit is now wondering about the next steps –
Possible way of arriving at the valuation of the company and thought of valuing using
relative valuation approach and DCF valuation approach.
Based on the above discussion and understanding, Ajit Khanna and his team will address the
following things to company:
 1. Project the Financial Statements of HCPL considering the various drivers as discussed
2. Estimate the Cost of Equity and Weighted Average Cost of Capital (WACC)
3. Calculate the relevant Free Cash Flows
4. Estimate Implied Valuation of HCPL using DCF and Relative Valuation
5. Apply Sensitivity Analysis on the output.

Note
 All the companies, institutions, and characters mentioned in the case study are fictious
 Financial year ends on 31st December, A – Actual and E-Estimated: FY24 to be treated as first year of
projection

Terms and conditions to the loan facility

Sr. Facility Terms and Conditions
No
.
1 W.C. 1) Limit up to 60% of W.C. subject to maximum 75 lakhs. 2) Working
Loan capital will exclude cash and cash equivalent 3) Interest rate :3.5%
above the base rate i.e. 13.5%.
2 Unsecured 1) Limit N.A. 2) Interest rate – 5% above the base rate i.e. 15% 3)
Loan Mandatory repayment of Rs. 15 lakhs p.a. starting from the year
immediately subsequent to the year of utilization. 4) Additional
repayment – As and when possible, by the company.
3 Secured 1) Limit up to 300 lakhs 2) Interest rate – 3% above base rate i.e. 13%
Loan 3) Mandatory repayment of Rs. 10 lakhs p.a. starting from the year
immediately subsequent to the year of utilization. 4) Additional
repayment – As and when possible, by the company.

Other Key conditions associated with these are as follows: -

 The company shall always maintain a year end cash balance equivalent to 2 months
of that’s year operating expenses.
 Any shortfall in the cash flow must be funded by the company in the Debt-to-Equity
ratio of 1.5:1. For the purpose of the debt both secured and unsecured loans will be
clubbed.