Eastern Spices Case Study Exercise

The purpose of this exercise is to build a full financial model for Eastern Condiments Private Limited (ECPL or the Company) including a P&L, balance sheet, cash flow statement and a dashboard. Eastern is a consumer food products company, which sells a range of branded spices in India and abroad. You are required to construct a full financial model for the next 4 years for the company. The dashboard, amongst other things, must include a product wise contribution analysis, and region wise P&L up to the operating profit level. A base financial model template and company related information on which you can start building the model is provided to you. Please remember that the financial model must allow for running various scenarios. For e.g. What if the emerging business grows only by 10%, what would the P&L and BS look like? Key facts about the company: We have provided you with a short presentation to give you an overview of the company. Some other details are as follows. Products & Markets ECPL manufactures and sells a range of branded packaged spices in India and abroad. ECPL has a pan India presence its dominant market is Kerala where it has a market share of over 70%. It is developing its presence in the rest of India. Its international market consists primarily of the Middle East market. The Kerala & international market is considered an established market by the company, while the rest of India (ROI) is considered to be an emerging market. As a market leader in Kerala, future growth will come by growing the market itself, especially in branded packaged spices. Within that, blended spices are expected to lead the growth. In ROI, ECPL plans to focus on the 4 states of Karnataka, AP, Maharashtra and UP in the first phase. Growth is expected to be driven by blended spices due to a strong company focus on the product. Middle East has formed nearly 95% of international revenues for the Company in FY2009. The Company is now also focusing on other countries where significant growth potential exists due to presence of large Indian diaspora. ECPL is eligible for export incentives on its international operations, a note on the applicable incentive is given to you. The raw material consumption by product is available to you. Following is the change in inventory adjustment required to arrive at raw material costs against sales as reflected in the P&L.
INR Million Change in WIP Straight Powders Blended Masala Powders Pickles Rice Powders Tea Coffee Other Products Commodities 31-Mar-07 (2) 2 (0) 1 (0) 0 0 0 31-Mar-08 7 1 3 (0) 0 1 (0) 1 31-Mar-09 (4) 0 9 0 3 (0) 0 (0)

Manufacturing Details

The company has two main plants one at Theni which manufactures straight powders only and one at Adimali which manufactures blended powders, pickles, rice powders and coffee. Part of the Theni plant production of straight powders is branded and sold directly while the rest is used for the production of blended powder. Straight powder constitutes the following % of the raw material for blended powder
31-Mar-07 Straight Powder per kg of Blended Masala Powders 74.0% 31-Mar-08 75.6% 31-Mar-09 74.1%

The Theni plant also has four captive windmills due to which its power costs are lower than normal. The windmills are not a part of the transaction consider an adjustment of INR 9 mn to normalize power costs in the Theni plant for FY2010. The Adimali plant is also the HO of the company costs attributed to the plant also consist of costs relating to marketing activities in Kerala and administration of other markets. Hence consider only 25% of the plant administration and salary costs towards production cost of the Adimali plant. Of the four products produced at the Adimali plant, the headcount split of employees at the factory between each of the products is as below
YoY Headcount split Masala Powder 70% Pickles 19% Rice Powder 10% Coffee 1%

The manufacturing process is more intensive for masala powders. Accordingly, proportion of Horse Power (HP) consumed for manufacture of masala powders is 81%. For the other products it is
YoY Horse Power Split Pickles 3.0% Rice Powder 13.5% Coffee 2.5%

The land at the Adimali factory has been sold to a related party on 1 Oct 2009 and has been leased back to ECPL at a cost of INR 1 mn per month for the Adimali factory and INR 1 lakh per month for the corporate HO. The company also has a plant in Okkal in Kerala. This plant only packs for the international markets and its costs are as follows
INR Million Okkal Packing for International markets Raw material freight and commissions Wages Power Other direct manufacturing costs Plant administrative costs Salary cost Total FY07 FY08 FY09

2.3 1.1 0.4 1.3 1.6 0.7 7.3

0.7 1.4 0.4 0.7 2.2 1.0 6.4

0.1 1.3 0.5 2.3 1.8 1.3 7.4

The company also has a plant at Oonnakul which only manufactures tea. ECPL does not manufacture tea at any other plant. The tea division was divested to a related party on 1 Apr 2009 and is not a part of this transaction. Details of the assets & liabilities of the tea division is as follows
INR Million (1) Fixed Assets Tea Business 31-Mar-09

(a) Gross Block (b) Less: Depreciation (c) Net Block (2) Current Assets (a) Inventories (b) Loans and Advances - Group Companies

12 2 10 15 (24)

SG&A Costs The established markets of Kerala and Middle East had the following S&D expenses in the last three years. There are 5 depots in these markets no additions are expected going forward.
S&D Expenses: Established, INR Million Depot Administration Expenses Depot Salary Cost Schemes and marketing expenses Market Development Expenses Vehicle Maintenance & Running Expenses Vehicle Logistics Expenses Freight & Sales Commission Other selling expenses Salaries of Sales Personnel Total 31-Mar-07 13 6 4 3 9 3 12 0 50 31-Mar-08 11 11 17 0 31 21 3 18 113 31-Mar-09 14 25 33 0 40 2 19 11 21 165

ROI had the following S&D expenses in the last three years. There are 12 depots in this market no additions are expected going forward.
S&D Expenses: Established, INR Million Depot Administration Expenses Depot Salary Cost Schemes and marketing expenses Market Development Expenses Vehicle Maintenance & Running Expenses Vehicle Logistics Expenses Freight & Sales Commission Other selling expenses Salaries of Sales Personnel Total 31-Mar-07 5 2 5 16 1 2 2 2 34 31-Mar-08 13 7 7 28 1 48 3 13 119 31-Mar-09 25 9 21 21 4 50 10 21 161

Since ROI is a high growth market salaries of sales personnel will increase YoY as follows
31-Mar-10 20% 31-Mar-11 37% 31-Mar-12 33% 31-Mar-13 21%

Growth in sales personnel salaries

Corporate SG&A costs for FY07 to FY09 are as follows. Please note that emerging markets will need more advertising in the coming years.
INR Million Advertising Expenses Established Emerging Total Administrative expenses 31-Mar-07 20 8 28 21 31-Mar-08 30 9 39 22 31-Mar-09 22 14 36 40

Corporate Salary Expenses

15

16

32

Vehicles ECPL has a unique sales & distribution model in Kerala. It directly distributes to all retailers using its own vehicles. It has 72 vehicles presently, it will add 3 more in FY2010 and will replace 3 vehicles each starting FY2011. Each vehicle will cost INR 4.67 Mn. In ROI, ECPL has recently changed its business model. Accordingly all vehicles existing as of FY09 have been returned at a net cost of INR 21.1 Mn. The company is now investing in new vehicles starting FY2010. You can plan vehicles additions based on the following sales per vehicle
Tonnes Yearly Sales Volume Carried per Vehicle 31-Mar-10 11.34 31-Mar-11 9.51 31-Mar-12 9.85 31-Mar-13 11.28

Each vehicle costs INR 1.76 lakhs; 85% is funded through debt. Assume 10% interest, 3 year tenure starting today. Also assume that the vehicles are given away to the drivers at the end of three years. Assume that the costs related to vehicle running will be captured under market development. There will be no vehicle logistics expense going forward. Vehicle maintenance & running expenses will be negligible. For simplicity, assumed market development cost per vehicle as follows
INR Market Development Cost per Vehicle 31-Mar-10 38,400 31-Mar-11 52,368 31-Mar-12 47,064 31-Mar-13 35,267

Balance Sheet Due to their unique operational model, the company only operates based on advance payments in the Indian
markets (Kerala and RoI)

Please note that the current liabilities currently include some amount towards purchase of capital equipment, this is not expected to continue in the future years.
INR Million Current Liabilities towards purchase of capital equipment 31-Mar-08 8 31-Mar-09 15

Good Luck!