Ignite is Ignited!!

Avinash looked back and thought how exactly a year and a half ago, he had this discussion with his
partner about launching a company that would get him closer to his passion. Automobiles!! As a kid
he grew up imagining how he would own a Bentley some day and would be able take a zip on the
Autobahn1. Once he and his batchmates, (Anubhav, Simran and Gauri), final year graduation project
received appreciation from Bentley Motors Limited (https://www.bentleymotors.com/en.html), he felt
that here was his opportunity to nurture his entrepreneurial streak and fulfill his childhood dream.
And a dream only gets better when you have a chance to live it and make it turn real with your friends
and buddies with whom you have spent the most memorable part of your life. Avinash and his friends
came together and decided to give it a try. Ignite, was born!!

Source: Bentley Motors Limited at https://www.bentleymotors.com/en.html

However, what lay ahead was the real challenge. Starting a business!!!

As engineers, Avinash and his batchmates, were good at core designing and were confident of
manufacturing the product as per specifications but a business entails a lot more. To ensure, that
they capitalize the opportunity provided by Bentley, they had negotiated for a six-month period before
the first shipment would become due to Bentley.

1 The highway in Germany

‘Ignite’.
*Disclaimer: The information contained in this case study is to be used only as a case study example for teaching purposes. The
information in the case study is both factual and fictional. Opinions formulated by the author are intended to stimulate class
discussion.
As soon as Avinash received the email from Bentley accepting the request for extension, he
immediately shared the screenshot with his team-mates on their whatsapp group - ‘Ignited’ inviting
them over for a long breakfast meeting the next day. A thumbs-up and celebration emoji’s begun to
show in Avinash’s notifications and the next morning the 4 seater dinning table turned into a drawing
board. All four of them begun to chart out the business details. Each member took up the
responsibility of estimating the costs of different business functions and decided to meet again at
Simran’s house after a fortnight.

At Simran’s

Anubhav, as his name suggested had some experience in manufacturing since his father owned a
pharmaceutical company in Himachal Pradesh, He was the first to present the details about
infrastructure which included land, factory building and the machinery. He mentioned that the land
would cost Rs. 1,50,00,000/- as they would need to put up an assembly line that would spread across
5,000 square yards. The factory building would be built at a cost of Rs. 50,00,000/- and furniture and
fixtures along with electrical fittings would cost Rs. 15,00,000/-. Additionally, the machinery which
would be required was to be imported from Germany at € 1,00,000 and the freight, insurance and
installation would be an extra € 10,000.

Simran and Avinash, were true engineers and so presenting production details came easy to them.
They indicated that the manufacturing of disc brakes required carbon-ceramic based metals (since
introduction of silica carbide increased the oxidization and thermal shock resistance, making the
brake discs last longer and better at handling wider range of temperatures). But they cautioned, ‘bro!
we’ve got to be mindful that this is an expensive proposition and would require placing orders with
the supplier well in advance’. Details of all raw material ordered are given in Table-1. Further, they
also presented the production details of manufacturing 100 disc brakes and the raw material it would
require keeping in mind all necessary technical information (Refer table 2)

Gauri, lovingly called ‘Rig’, had the most pleasant personality of them all and she was almost a family
member to Anubhav, Simran and Avinash’s home. Rig’s, parents lived in Kuwait and therefore all
short breaks in college and long weekends meant tagging along with one of the three of them and
go along with them to their home towns. Her task to manage funds was the toughest of it all. But
perseverance pays!

She had convinced Anubhav’s dad, along with her hotelier father and 3 of her uncles to support
Ignite. Her last victory was the buy-in from Simran’s fashion designer sister, Sonam and her
husband, who agreed to contribute to their venture. Gauri had managed to pull in 15 members
(including the four of them) who were willing to put in the initial capital to start Ignite. The initial
estimate was to raise INR five crores by issuing 50 lakhs shares with a face value of Rs. 10/- and
this was duly subscribed to by all the members. With the initial capital raised, Ignite acquired land at
a cost of Rs. 1,50,00,000/- which was well in line with the estimation made by Anubhav.

pg. 2
An Auspicious Start

With the money in hand, the first thing that Simran and Anubhav, was to place orders for silica
carbide and all other raw material as soon as the machinery was being installed. An advance of Rs.
10,00,000 was paid at the time of placing the order and the balance amount was to be paid off by
the end of the year. (refer Table-1)

As there were significant cash outflows at the start of the project, Gauri, after consulting the team,
applied for a ten-year bank loan of Rs. 1,50,00,000/- from ‘Your Bank’ which was duly sanctioned.
The funds were disbursed on 30/6/2020 on fair terms, (at an interest rate of 10% p.a.) which was to
be paid after every six months i.e. (31/12/2020, 30/6/2021 and so on…)

Time Flies: Ignite turns One

At the annual meeting, the four friends turned entrepreneurs, were gripped with mixed emotions.
The thrill of the year gone past was visible on their faces. Simran had not met her favourite pet,
Zombie, for over 12 months since she had not got enough time to take a break and visit her parents.
Anubhav, had picked up 8 kgs of weight and Gauri, the reverse. She had lost 5 kgs of weight because
of the stress of managing funds and handling accounts and finances had taken a toll on her. She
had virtually lost her appetite. The only task she did apart from focusing on Ignite, was painting.
Anubhav was the only one who seemed to be moderate. Maybe his yoga and pranayama helped to
keep his balance. During the first year of operations, Ignite, was able to manufacture 8,000 disc
brakes of which they sold 7,500 to Bentley. Revenue at the rate of Rs. 2000/- per disc brake was
invoiced. Bentley motors paid Rs. 1,25,00,000/- to Ignite before the end of the year. The stock of
500 disc brakes was considered worth Rs. 5,42,500/- Similarly, a physical verification of the raw
material stock lying in the factory premises, reflected a value of Rs. 7,70,000/-. The health of Ignite,
reflected in the details which lay before the four of them. For additional financial details of Ignite,
refer table 3

The Magical Question!

Now the question looming over the four of them was so basic. They looked at each other and the
balanced one, Avinash, broke the silence and asked, ‘what does our profit look like? The other three
looked at Ignite’s bank account which reflected a balance of Rs. 3,39,83,000 and smiled.

pg. 3
Exhibits:

Table-1: Raw Material Details

Raw Material ordered Quantity (Tons) Amount (Rs.)

Silica Carbide 5 5,00,000
Carbon 15 11,50,000
Ceramic 25 14,50,000
Cast iron 100 7,50,000
Total 38,50,000

Table 2: Technical details of manufacturing 100 disc brakes

Raw material Consumption for 100 disc brakes (Tons)

Silica Carbide 0.05
Carbon 0.15
Ceramic 0.25
Cast iron 1.00

Table 3: Additional Financial Transactions

1 The wages and salary expense for the entire year came to Rs. 36,00,000 out of which the
company had paid Rs. 30,00,000, the balance was yet to be paid as on 31/3/2021
2 The total administrative, distribution and branding cost for the year was Rs. 20,00,000. The
company had paid Rs. 22,00,000 (including an advance for the next quarter of 2021-2022)
during the year.
3 The machinery, factory building, furniture & fixtures were all decided to be depreciated at
the rate of 15% using Written Down Value method.
4 Ignite, decided to invest Rs. 15,00,000 in 8% Government securities on 1/1/2021. The
government securities were expected to give interest on an annual basis.
5 Ignite, took a fire insurance of Rs. 5,00,00,000/- to insure the factory building and
machinery. The annual insurance premium paid for this was Rs. 5,00,000/-
6 Tax was to be paid to the government at the rate of 30%
7 The exchange rate prevailing at the time of import of machinery was 1€=Rs. 85

pg. 4
 IGNITE IGNITED (Part B)

Background:

‘…there are ways of getting almost anywhere you want to go, if you really want to go’

Langston Huges

Aspirations hold a sway over all human minds and therefore the team of four – Simran, Avinash,
Gauri, Anubhav who had by now begun to call themselves SAGA were determined to make it better
in the coming year and create a name for themselves in the market.

They had charted out a vision and mission statement for Ignite, right after receiving an award from
the Prime Minister (PM) of India, Mr. Narendra Modi, as the top 25 start-ups in India, under the Make
in India initiative. Pictures of the virtual award ceremony adorned the reception of the office with one
each kept on the tables of each of them. The citation from the PM’s office was their greatest
assurance which propelled their confidence. That evening the four of them met to celebrate. The
Zoom backgrounds were a metaphorical indication of what mattered most to them. The smiles on
their faces and the toast they made to each other, had the ‘thumbs up’ and ‘clap’ reactions pasted
against their appearances in the Zoom grid view.

Rig, couldn’t hold herself and asked, ‘Now what? Where do we see ourselves going from here? Top
25 is a good start but we need to make more money. Simply put ‘Ignite needs to be richer.’ Her Zoom
wallpaper had a DB11, an Aston Martin and the other three could guess what was on her mind.

In the Thick of Action

Aston Martin had confirmed an order for 2,500 carbon-ceramic disc brakes and this was Simran’s
act to lend support to Rig’s ambition for Ignite. No wonder, her wallpaper had the photograph of the
vacation which the two of them had taken to London where they had visited the Aston Martin Heritage
Museum. It was overwhelming for team SAGA to believe when on the same day, they received an
email from Bentley Motors, about not only continuing their order of the previous year (7,500) but also
placing an additional order of 4,400 carbon-ceramic disc brakes. Avinash was the one who had been
following up with the Bentley Motors team and finally after 4 rounds of presentation to different
departments at Bentley, this breakthrough had come about. His smile was still the same as gentle
and balanced as it was on the 15th December, 2019, when Bentley Motors had confirmed their first
order and agreed to give an extension of 6 months to Ignite. Just as his wallpaper held the silhouette
of a yogi sitting in a meditative pose.

Rig had got in an approval for extra funding since they needed to invest in additional machinery and
other assets needed to ramp up production (for details refer Table-1) and Anubhav, vigilant and
cautious as he always was, held a deep-seated faith that Ignite should work towards consolidating

pg. 5
their position in the market, achieve stability, develop a stronger relationship with Bentley for the
coming year or two. His wallpaper had the cropped photograph of the four of them from the welcome
party of their college. As young adults, about 18 years of age, they looked fresh and innocent. Broad,
carefree smiles on their faces is what Anubhav felt was most important. He had mentioned to the
other three, ‘we’re going too fast. Let’s get a grip of the ground first, hold our feet firmly and then
attempt to fly’. Rig had replied, ‘Anubhav, we’re SAGA. And that’s never easy to be’, to which
Anubhav immediately said, ‘exactly Rig. We’re SAGA and not GAAS. SAGA is made over a period
a time. Why are we flying like GAAS?’ Rig, laughed him off, ‘You sound so much like your dad. Too
slow and sluggish.’

Rig was caught in getting the funding, Avinash was focused upon reconfirmation and additional
orders from Bentley while the two were trying hard to negotiate the credit period with Bentley Motors.
During their communication with Aston Martin, they hadn’t even mentioned about any extension of
the delivery date since it was Aston, a fantasy for Simran and too aspirational for Anubhav. In fact,
Anubhav actually didn’t ever have the conviction that Aston Martin would book an order with Ignite.

They were getting into serious business now, Bentley Motors was their only customer and the one
who helped establish their credibility in the market as a start up with an offering that could match the
best in the industry. SAGA didn’t seem to have an option but to agree to a credit period of 90 days!!
Simran was aware of the huge cash balance that they were able to built up last year and hence she
went ahead and ordered for the raw material and incurred other manufacturing expenses (details in
Table-2). SAGA almost reached double the production of the last year as they manufactured 14,000
units of the disc brake in the year 2021-2022, this in itself was an achievement, but for Rig- “this is
only similar to the initial acceleration that one gets when we touch 9000 rpm in the third gear of a V-
12, wait till we hit the top gear”

The moment of reckoning

It was April 2022, one month after the end of the financial year, Anubhav was sitting in his cabin and
the phone rang. As he heard intently, he knew it that it was time to take some tough decisions. The
private equity investor on the other end asked questions, answers to which he didn’t have. Before
deciding to speak to the rest of the team about the offer, he decided to call his accountant, Mr.
Banerjee, hoping for some answers. However, Mr. Banerjee had very little strategic information to
share (Refer Table-3). Anubhav, was left to find out the answers to those questions.

pg. 6
Table-1 Long term sources and applications

Amount (In Rs.)

1 Newly sanctioned loan from Your Bank pending disbursement 50,00,000
2 Additional Building construction cost incurred 65,00,000
Additional Machinery cost incurred (€ 1,25,000 inclusive of installation and 1,11,25,000
freight)
3 Additional purchase of Furniture & Fixtures 25,00,000
4 The cash and cash equivalents at the end of the year 2021-2022 was 1,46,02,288

Table-2 Operating and manufacturing expenses incurred and paid for the year 2021-2022

Amount (In Rs.)

1 Raw material purchased 63,00,000
2 Wages and salaries 60,90,000
3 Administrative 49,00,000
4 Insurance premium 5,00,000
5 Tax @ 30%
6 Depreciation @ 15% written down value method

Table-3

Amount (In Rs.)

1 Closing stock of raw material as on 31/3/2022 was valued at 7,50,000
2 Closing stock of finished goods as on 31/3/2022 was valued at 1,24,500
3 The selling price of disc brakes throughout the year was Rs. 2,000/unit
4 The trade receivables of the previous year had paid the full amount
due to Ignite during the year 2021-2022
5 The wages and salaries which were payable last year, were duly paid
for during the year 2021-2022
6 Accounts receivable at the end of the year 2021-2022 was 96,00,000

pg. 7