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Case Study on Sensitivity Analysis Business Case

ABC Motors Limited


ABC Motors Ltd. is one of the leading automobile company in India having global presence. In 10
years since start of operations, the company had launched both a high-end limited edition
Roadster and its Model S production car. The Model S had received the coveted Car of the
Year award and earned the highest rating that Consumer Reports ever gave to a car, an
astonishing feat for a company that was only at its second car. It has enjoyed undisputed
leadership in the domestic market over several years, riding a comfortable 30% plus market
share. Its portfolio consists of only diesel sedans, and hence it also leveraged on the advantage
of petrol-diesel parity in India. It has launched many successful product in last few years and now
planning to develop a new product Model X.
The decision to manufacture Model X was made based on business case evaluation results. The
business case was prepared based on future estimate of GDP growth, growth in auto industry,
market share considering competitive landscape, expected inflation trend and exchange rate
movement which is summarized below.

GDP
Inflation (WPI)
Repo Rate
USD Rate
Crude Oil ($)
Petrol-Diesel Parity
Commodity Increase (YoY)
Value engineering savings (YoY)
Selling price Increase (YoY)
SIAM Industry growth forecast
Market Share

Business
Case
Assumptions over project
period
5% -9%
6% - 8%
7% - 8%
45 - 50
90
75% - 78%
2%
1%
1.5%
18% -20% p.a.
30% - 45%

Indian Automotive Industry - Scenario at the time of business case evaluation


The Indian Automotive Industry after de-licensing in July, 1991 has grown at a spectacular rate
of 17% on an average for last few years. The export in automotive sector has grown on an average
CAGR of 30% per year for the last five years. The industry being highly capital intensive, it offers
huge entry barriers
The automotive sector with its deep backward (metals such as steel, aluminum, copper etc.,
plastics, paint, glass, electronics, capital equipment, trucking warehousing and logistics) and
forward (dealership retails, credit and financing, logistics, advertising, repair and maintenance,
petroleum products, gas stations, insurance, service parts) linkages has been the critical success
factor.

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Copyright 2015 Mahindra & Mahindra Ltd. All rights reserved.

Business case financials


By capturing above key assumptions, the business case was prepared & year wise financials for
the project period 7 years is tabulated below.

L-2
Capex outflow

331

L-1
324

Sales Volume (nos)


- Domestic
- Exports

L+1

L+2

L+3

L+4

L+5

Rs Crs
L+6

145

24,000 30,000 31,000 33,000 40,000 50,000 60,000


0 19,000 23,000 28,000 30,000 32,000 34,000

Sales Revenue
Material cost
Overheads

1,200
960
120

2,487
1,980
245

2,782
2,203
270

3,189
2,514
305

3,715
2,914
350

4,417
3,447
410

5,139
3,991
470

Cash Profit

120

262

308

370

451

560

678

Income Tax

65

105

134

171

211

120

262

243

265

318

389

467

(25)

262

243

265

318

389

467

Cash profit post tax


Net cash Flows
Post Tax IRR

(331)

(324)

23%

L= Year of Launch

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Copyright 2015 Mahindra & Mahindra Ltd. All rights reserved.

Current Situation
At the time before 6 months of launch of Model X, the economic, political & auto industry is
witnessing changes compared to assumptions made at the time of business case preparation.
Current Scenario:

The world has still not recovered from the global economic crises, US on slow recovery
path & Eurozone continues to be under recession and correction also taking place in
developing countries.

Chinas growth slowdown resulting in excess capacity and commodity deflationary


pressures.

Indian Govt. decides to move diesel pricing to market basis.

China and Japan join Europe in liquidity infusion totaling about USD 200 bn / month.

Company is struggling with value engineering plan execution

Few of the key suppliers are demanding compensation towards non achievement of
volume commitments & this situation the company had never experienced in the past

A formidable MNC Competitors having deep pockets making investments in India are
launching range of new products and is expected to be a direct competitors. The order
book of one of the MNC competitor since launch has booked 20,000 bookings and will be
fulfilling the orders by 5 months.

Product Launch of Model X due for launch is delayed further by 6 months.

One of the key Export market has imposed Anti-Dumping duty of 30% hampering the
exports from India

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Copyright 2015 Mahindra & Mahindra Ltd. All rights reserved.