NAME:

Roll No.:

CGPA:

INSTRUCTIONS:

 You will be allocated 3hrs to solve the case study

 Please present your analysis and key working clearly and highlight the key numbers
 Please provide your recommendations for the problems posed in the case in a clear and concise manner
 Please attach all your rough workings as well

Mr. Vaibhav has been appointed as the CEO of ABC Limited very recently. The company is a conglomerate
which operates in four key segments: Pharmaceutical, Automobile, Textile and Mining.

Mr. Vaibhav believes that the long-term goal for any company should be shareholder wealth maximisation
which is possible only if the company takes decisions that lead to value accretion. However Mr. Vaibhav’s
decisions have to also ensure that the credit health of the company continues to remain robust to support its
future operations. Challenging operating environment and headwinds in the macroeconomic environment have
impacted ABC’s financial position and it faces a potential rating downgrade. It is critical for Mr. Vaibhav to
ensure that ABC continues to retain its Credit rating of BBB- from S&P, as any downgrade would result in a
sub-investment grade rating thus limiting its ability to source debt at competitive rates. S&P, in their ratings
report have provided for the following two threshold covenants; Debt / EBITDA of 3.0x and EBIT Interest
Cover of 15.0x

With these goals in mind Vaibhav approaches Ankita, a Relationship Manager in ANZ and you are the analyst
accompanying her for the discussion on 31st December 2017. Vaibhav, first wants to have a sense of what
could be the potential value of ABC Ltd. in the current market situation. Given the diversified nature of ABC
Ltd. Ankita suggests that a Sum of the Parts valuation approach would yield the most accurate result. Based
on inputs provided by Mr. Vaibhav and also the recent industry trends you proceed valuing ABC Ltd. with the
following assumptions. The Effective cost of debt for the company is 10% and the risk free rate and the market
premium currently are 6.0% and 8.0% respectively. You calculate the beta for the segments as: Pharma:
0.58, Auto: 0.68, Textile: 0.69 and Mining: 0.83. Based on the latest estimates from Bloomberg you assume
the growth rates for the segments to be as: Pharma: 5.0%, Auto: 3.0%, Textile: 7.0% and Mining: 3.0%.
During this exercise you realise that the mining sector is a significant drag on the valuation of ABC Ltd. and
this should be explored more closely.

The Mining segment in India and globally is facing headwinds due to volatile commodity prices and also due
to general supressed demand of metals. Also the asset heavy balance sheet of the mining segment could be
deployed in segments with better returns profile. Bearing this in mind Ankita tables the following options for
the Mining Segment:

 Option 1: Along with the planned capital expenditure, an additional INR 500 million to be invested in
the segment that will result in an additional EBIT of INR 100 million in FY2018 and is likely to improve
the EBIT in the coming years. However the additional investment will have to be funded in such a way
that the capital structure for all the segments remains unaltered
 Option 2: Shutting down the Mining segment which will result in a one-time payment of INR 200
million in total to the Government of India which includes environmental impact fees and restoration
costs. This will also have to funded in a similar manner such that the capital structure for all the
segment remains unaltered
 Option 3: Sale of the Mining segment to a competitor at a very nominal value to avoid any payment
related to shut down. The competitor will be able to generate revenue and cost synergies

Carry out the necessary analysis to help Mr. Vaibhav reach an informed decision on which of these options
would be the best aligned with his goals for ABC Ltd.

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As all the suggested options would require a major realignment of the company’s operations, Mr Vaibhav has
asked Ankita for alternative solutions which could help in supporting the covenants, with the base financials
for the company and segments remaining same as FY2018, prior to any divestures. A closer analysis of ABC’s
debt structure and maturity profile reveals a possible opportunity. ABC Ltd. has an outstanding 10 year, INR
500m bond which was issued on 1st Jan. 2015 with a coupon of 12.0%. Ankita suggests that the company
could possibly buyback the outstanding bonds in the market at the trading value and refinance these bonds
through a new issuance with a coupon rate of 7.0%. Mr. Vaibhav is intrigued by this option but is not sure if
this would help ABC ltd. in providing buffer against the possible ratings downgrade and has asked Ankita and
you to furnish further details on the implication to ABC ltd. of this decision.

Mr Vaibhav was also curious to know if the company should refinance now or wait for a more opportune time
as he believes that the downward trends in yields over the last few years will continue in the near future and
allow him to get cheaper debt at a later date. Based on recent trends and market developments do you think
Mr. Vaibhav’s opinion is correct and should we push out the refinance exercise if he decides to go for it. What
are your views regarding the interest rate and yields for the near future?

Please present your views on interest rate and yields for near future here
You can write your response in the separate Word Doc or Paper and share in the e-mail

During the discussion Mr. Vaibhav also raises concerns about the forex exposure his company has due to its
operation in the international markets which are all invoiced in USD. He wants to get a view of the potential
impact volatility in USD/INR exchange rate can have on FY2018 forecasted financials. As the FY2018 financials
are prepared assuming 1.0 USD = 64.0 INR and at 3 sigma level the latest Bloomberg forecasts range for 1
USD is estimated to be 61 INR – 67 INR for FY2018. Do you think this range of exchange rate poses a threat
to the company’s credit rating? If so, what components do you think the company should hedge and what
position should it take? Please give your opinion on the exchange rate movements in the near future as well:

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 Please present your views on the exchange rate movements in the near future here
You can write your response in the separate Word Doc or Paper and share in the e-mail

Shifting focus back to value maximisation, Ankita suggests that ABC Ltd. could look at in-organic growth
opportunities through mergers & acquisitions. Mr. Vaibhav was unsure if the company could further leverage
itself given the possible ratings downgrade the company was facing. Ankita has asked you to assess the debt
capacity and maximum debt headroom of ABC Ltd. such that the company does not face a ratings downgrade.
The debt capacity is the maximum amount of debt that the company can have on its balance sheet such that
the covenants are adhered to and debt headroom is the debt capacity minus the existing debt on the balance
sheet that indicates additional debt that can further be raised in addition to the existing debt.

Can you also calculate the debt capacity and debt headroom after the implementation of your suggested
solution?

Below are the financials for ABC Limited.

Note: All figures are in INR Million unless specified otherwise

Income Statement – For financial year ending 31st December, 2018

Segment 1 Segment 2 Segment 3 Segment 4 Company
Pharma Auto Textile Mining ABC
Revenue 5,137.0 3,491.0 1,379.0 6,172.0 16,179.0
In INR 35% 60% 75% 30%
In USD 65% 40% 25% 70%
Cost of Goods Sold 2,350.0 1,600.0 421.0 3,500.0 7,871.0
In INR 30% 25% 20% 20%
In USD 70% 75% 80% 80%
Selling and General expense 1,650.0 1,520.0 700.0 2,250.0 6,120.0
D&A 154.1 87.3 55.2 92.6 389.1
Interest expense - 16.0 17.5 88.0 121.5
Tax 294.9 80.3 55.6 72.4 503.2

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Balance Sheet – As on 31st December, 2018
Pharma Auto Textile Mining ABC
Cash and cash equivalents 50.0 150.0 100.0 25.0 325.0
Accounts receivable 543.0 234.0 314.0 536.0 1,627.0
Inventory 123.0 80.0 65.0 40.0 308.0
PP&E 745.9 912.7 194.8 2,007.4 3,860.8
Intangible assets 800.0 300.0 100.0 200.0 1,400.0
Other non-current assets 228.0 143.0 96.2 106.0 573.2
Total Assets 2,489.9 1,819.7 870.0 2,914.4 8,094.0

Accounts payable 334.0 167.0 120.0 402.0 1,023.0

Short term debt - 40.0 60.0 200.0 300.0
Long term debt - 120.0 115.0 680.0 915.0
Other non-current liabilities 155.9 52.7 50.0 312.4 571.0
Total Liabilities 489.9 379.7 345.0 1,594.4 2,809.0

Equity 2,000.0 1,440.0 525.0 1,320.0 5,285.0

Balance Sheet – As on 31st December, 2017

Pharma Auto Textile Mining ABC
Cash and cash equivalents 32.8 108.3 231.8 203.0 575.9
Accounts receivable 500.0 290.0 270.0 490.0 1,550.0
Inventory 140.0 100.0 50.0 70.0 360.0
PP&E 400.0 800.0 100.0 1,300.0 2,600.0
Intangible assets 600.0 200.0 80.0 150.0 1,030.0
Other non-current assets 259.2 164.3 103.5 113.0 640.0
Total Assets 1,932.0 1,662.6 835.3 2,326.0 6,755.9

Accounts payable 370.0 110.0 80.0 300.0 860.0

Short term debt 100.0 50.0 70.0 100.0 320.0
Long term debt - 150.0 200.0 600.0 950.0
Other non-current liabilities 150.0 100.0 90.0 175.0 515.0
Total Liabilities 620.0 410.0 440.0 1,175.0 2,645.0

Equity 1,312.0 1,252.6 395.3 1,151.0 4,110.9

Planned Capital Expenditure – For financial year ending 31st December, 2018
Pharma Auto Textile Mining ABC
Capital Expenditure 500.0 200.0 150.0 800.0 1,650.0

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