Ad Honerem Round 2

CONUNDRUM
Onkar Dewan feels weird as he sips on his daily evening scotch sitting in his plush office in Fort,
Mumbai. It doesnt feel the same, he feels troubled. As the CEO of a huge, diversified
conglomerateDracarys Ventures Public Ltd. (DVC), it seems he must have it all - and everything
was all rosy till recently. Now he could feel the vultures circling - who could swoop in at any time
and snatch away his companies. It was all because of Dracarys Commodities Traders (DCT) DVCs blue-eyed commodities exchange. If only that whole fiasco with the other trading house
wouldnt have happened - their stock price wouldnt have dipped so much, not making them such
an easy target for a hostile takeover. Come to think of it, Dewan mused to himself, We are
majorly known for our trading house, not for our other businesses. Maybe that is why we are here
today. But, I cannot let them just swoop in. NO! Something needs to be done and done right now.
So he calls in his trusted CXOs (all except his CFO) - the scintillating trio as he likes to call them
himself - and asks them to come up with a solution, the best defence. So, the trio gets to work.

FLASHBACK
DVC had earlier been just an FMCG company - Smooth Care, specialising in body care products.
But, noticing the IT boom, they acquired a budding ERP firm - nowadays known as Resourceful
ERP Solutions - and made it stronger. But, they thought they hit true gold when they got hold
of DCT - a commodities exchange just beginning to get booming business. Here was a business
which had anon-stop steady stream of income with very low risks. They did good work with it too,
and soon enough become famous for their exchange - much more than for their shampoos, body
creams and software solutions. (The financials for all three businesses are provided.)
But how long can you keep it peachy, and soon trouble came before there could be paradise - when one of
their companys peer messed it up. TCX, another commodity trading house - a competitor of DVCs
own DCT - went bust as spurious deals were discovered on its sheets. This spoilt it for the whole industry
as commodity exchanges were compared with betting houses and the market took out its scorn on DCT as
well - leading to an already undervalued DVC dipping to unforeseen lows. Trading for around Rs.230 before
the scandal, it plummeted to Rs.150 in a matter of days - showing no signs of recovering.

Nobody saw the eternally stable Smooth Care, no-one noticed the growing Resourceful ERP
Solutions- DCT had become too famous (or maybe infamous now) for DVCs own good. DVC had
historically been a big name on the stock market - a booming conglomerate with highly diversified
businesses. They were highly sought after as employers too. With private jets, cruise ships,
exquisite dining and unbelievable parties - who wouldnt want to join them? In fact,
their CFO - Vishal Das was a bit too infamous for his feats in the bar.
So, as the trio left the CEOs office they were worried and hurried. Their boss needed a solution,
they had to find it.

Ad Honerem Round 2

LOOK FOR ONE, YOU FIND THREE!

They did what any business looking for a solution does first - hire a consultant. And walked in The
Spunky Consultant. They researched and held meetings and came up with a suggestion to spin
offDCT. It made perfect sense, they said, as DCT was the root cause of it all and DVC needed to
save its other businesses. The wolf bites off its paw to save the rest of itself - and that is what DVC
should do.

As the consultants were into their research, the trio decided to talk to the IRON BANK as a
backup, and see if they had some tricks up their sleeves. The IRON BANK came back to them with
the advice to initiate a Stock Buy-Back to shore up its price - making DVC less attractive for a
takeover. They offered to handle all the transactions and other activities related to the buyback.
As the trio pondered over these two very different suggestions, the CFO Vishal Das - while on one
of his sojourns to an upscale bar - met a high ranked banker from White Coal Investments, a
private equity firm. The banker recognized him as the DVC CFO, remarking, Your stock has been
undervalued for years. Even more so now. Hearing this, the CFO couldnt stop himself and
revealed all his woes to his new friend - who came up with a proposition for DVC overnight. LBO
he triumphantly announced as he and Das met the trio, That is the only route you should be
thinking of going. Think of all the benefits it would bring you once you unlock all the hidden
potential. And the management would get a huge piece of the pie for sure. A piece worth
hundreds of millions

WHICH ROAD TO TAKE?

Now the trio were in a big dilemma - all 3 solutions made sense to them. But they were not at all
sure which one they should put before the CEO. So, they went to him with all three. Dewan knew
he had to save DVC and had to use the tools which had the strongest financial logic to them. He
had three ways he could go.

Which should he choose? Your answer should have strong financial backings.

Ad Honerem Round 2

FINANCIAL STATEMENTS
The Financial Statements required are provided in the following pages.
A few points to note are:
1.All the figures are in INR crores.
2.Total number of outstanding DVCs shares are 500 million.
3.You can use the following rough rates for growth in available value:
a.DCT - 10%
b.Smooth Care - 7%
c.Resourceful Solutions - 12%

Smooth Care
Balance sheet
Mar '15

Mar '14

Mar '13

Mar '1

Total Share Capital

229.17

229.05

228.94 228.76

Equity Share Capital

229.17

229.05

228.94 228.76

Sources Of Funds

Reserves

2270.83 1866.77 1482.75 1218.35

Networth

2500.00 2095.81 1712.72 1447.11

Secured Loans

23.38

29.53

Unsecured Loans

34.83

287.95

334.00 309.86

Total Debt

58.20

317.48

359.12 332.95

Total Liabilities

25.13

23.09

2558.20 2413.29 2071.84 1780.06

Application Of Funds
Gross Block

1336.56 1232.30 1160.72 1007.81

Less: Accum. Depreciation

477.56

422.01

391.49 353.93

Net Block

859.01

810.29

769.22 653.88

Capital Work in Progress

21.99

22.43

Investments

1469.80

958.57

33.01

15.66

726.37 682.36

Ad Honerem Round 2

Total Current Assets

1549.13 1412.02 1332.49 905.62

Total CA, Loans & Advances

1751.79 1925.04 2165.28 1731.10

Current Liabilities

1175.67 1014.49 914.27 708.40

Provisions
Total CL & Provisions
Net Current Assets
Total Assets

368.70

288.55 778.51 703.55

1544.37 1303.04 1692.78 1411.96

207.42

622.00 472.50 319.15

2558.20 2413.29 2071.84 1780.06

Income statement
Mar '15

Mar '14

Mar '13
4

Mar '12
2

Income
Sales Turnover

640.01

571.58

499.13

434.39

Excise Duty

0.00

0.00

5.09

4.07

Net Sales

640.01

571.58

494.04

430.32

Other Income

14.30

11.42

0.91

5.15

Stock Adjustments

1.62

-3.39

7.80

10.29

Total Income

655.94

579.61

502.74

445.75

Raw Materials

340.51

302.50

275.04

228.76

Power & Fuel Cost

6.55

6.32

6.10

5.57

Employee Cost

45.20

36.96

31.98

30.34

Selling and Admin Expenses

0.00

0.00

79.62

77.42

Miscellaneous Expenses

140.86

123.27

19.06

13.16

Total Expenses

533.12

469.05

415.11

358.55

Operating Profit

108.51

99.14

86.72

82.05

PBDIT

122.82

110.56

87.63

87.20

Interest

2.54

2.42

1.76

1.70

PBDT

120.28

108.14

85.87

85.50

Expenditure

Ad Honerem Round 2

Depreciation

7.08

9.62

4.84

4.96

Profit Before Tax

113.19

98.52

77.21

78.36

PBT (Post Extra-ord Items)

113.19

98.52

77.21

78.39

Tax

24.87

20.85

16.27

16.41

Reported Net Profit

88.33

77.66

60.88

61.95

Equity Dividend

40.10

34.36

29.76

26.31

DCT
Balance sheet
Mar '15

Mar '14

Mar '13

Mar '12

Total Share Capital

110.72

110.72

110.22

109.28

Equity Share Capital

110.72

110.72

110.22

109.28

Sources Of Funds

Reserves
Revaluation Reserves
Networth
Total Debt
Total Liabilities

2746.43 2400.49 2053.95 1726.81

0.00

0.00

0.00

0.00

2857.14 2511.21 2164.16 1836.10

0.00

0.00

0.00

0.00

2857.14 2511.21 2164.16 1836.10

Application Of Funds
Gross Block

493.10

540.47

495.23

498.46

Less: Accum. Depreciation

116.90

98.80

88.03

74.48

Net Block

376.20

441.67

407.20

423.98

Capital Work in Progress

0.52

2.13

0.30

0.02

Investments

2365.91 2319.04 2497.01 1787.86

Sundry Debtors

19.52

15.04

111.65

106.09

Cash and Bank Balance

741.87

754.46

678.19

707.15

Total Current Assets

761.38

769.50

789.84

813.25

Ad Honerem Round 2

Total CA, Loans & Advances

1038.22 1113.94 1167.95 1043.95

Current Liabilities

827.53 1163.96 1567.42 1339.85

Provisions

96.15

201.61

340.88

79.87

Total CL & Provisions

923.68 1365.57 1908.30 1419.71

Net Current Assets

114.54 -251.63 -740.35 -375.76

Total Assets

2857.16 2511.21 2164.16 1836.10

Income statement
Mar '15

Mar '14

Mar '13

Mar '12

Income
Sales Turnover
Other Income
Total Income

1139.57 1137.47 1142.34 800.83

215.51 262.09

192.08 170.20

1355.07 1399.57 1334.42 971.03

Expenditure
Employee Cost

68.06

62.80

60.76

57.38

Miscellaneous Expenses

355.14 390.44

355.03 327.20

Total Expenses

423.20 453.24

415.80 384.58

Operating Profit

716.37 684.23

726.54 416.25

PBDIT

931.87 946.32

918.62 586.45

Interest
PBDT
Depreciation

2.30

0.07

929.57 946.26
74.46

66.76

0.02

0.07

918.60 586.39
58.98

53.53

Profit Before Tax

855.11 879.50

859.62 532.85

PBT (Post Extra-ord Items)

855.11 879.50

859.62 532.85

Tax

227.50 231.18

238.34 157.67

Reported Net Profit

627.61 648.32

621.29 375.18

Equity Dividend

265.72 265.72

265.72

55.36

Ad Honerem Round 2

Resourceful Solutions

Balance Sheet
Mar '15

Mar '14

Mar '13

Mar '12

Total Share Capital

78.19

77.82

75.94

75.01

Equity Share Capital

78.19

77.82

75.94

75.01

Sources Of Funds

Reserves

2998.73 2385.56

1719.69 1380.86

Networth

3076.92 2463.38

1795.64 1455.86

Total Debt
Total Liabilities

5.06

46.69

83.26

8.63

3081.99 2510.07

1878.89 1464.49

1323.29 1194.09

1086.83 1054.58

Application Of Funds
Gross Block
Less: Accum. Depreciation

678.99

708.62

600.98

490.91

Net Block

644.30

485.47

485.85

563.67

Capital Work in Progress

93.01

107.07

37.32

5.25

Investments

1003.01

800.87

582.23

212.83

Total Current Assets

1346.17 1077.46

874.00

597.80

Total CA, Loans & Advances

2196.92 1777.45

1398.29 1122.65

Current Liabilities

552.79

452.28

489.04

340.53

Provisions

302.46

208.52

135.76

99.38

Total CL & Provisions

855.25

660.80

624.80

439.91

Net Current Assets

1341.67 1116.65

773.50

682.74

Total Assets

3081.99 2510.07

1878.89 1464.49

Ad Honerem Round 2

Income statement
Mar '15

Mar '14

Mar '13

Mar '12

Mar '11

Income
Sales Turnover
Other Income

5684.69 4428.71 3591.27 2829.59 2312.52

92.63

65.63

65.07

85.69

144.97

Total Income

5777.32 4494.34 3656.34 2915.29 2457.49

Employee Cost

3341.51 2676.58 2299.11 1847.58 1394.62

Expenditure

Other Manufacturing Expenses

0.00

0.00 190.89 170.26

137.97

Selling and Admin Expenses

0.00

0.00 323.65 325.71

241.01

Miscellaneous Expenses

1198.22

904.57 227.64 139.32

100.79

Total Expenses

4539.72 3581.15 3041.30 2482.88 1874.39

Operating Profit

1144.96

847.56 549.98 346.71

438.13

PBDIT

1237.59

913.19 615.05 432.41

583.09

Interest

0.75

PBDT

1.88

13.50

9.60

1236.84

911.32 614.11 418.91

573.49

Depreciation

151.70

117.01 130.32 133.51

114.50

Other Written Off

0.00

Profit Before Tax

1085.15

Extra-ordinary items

0.00

PBT (Post Extra-ord Items)

1085.15

Tax

239.08

158.82

55.32

71.48

Reported Net Profit

846.06

635.49 410.09 230.83

390.22

0.00

0.94

0.00

0.00

794.31 483.79 285.40

459.00

0.00

0.00

6.94

0.75

2.68

794.31 490.73 286.15

461.68

80.63