Case Study on EVS Pvt. Ltd.

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EVS Pvt. Ltd. started its operations to manufacture Product A on 1st

April 2022 with an authorized capital of INR 2 million (200,000 shares of
INR 10 each). The 4 promoters of the company contributed INR 500,000
each for 25,000 shares issued to each one of them. In addition to the
contributed capital, EVS Pvt. Ltd. raised INR 15,00,000 @10% per
annum from HDFC Bank on 1st April 2022. The interest rate will jump to
12% in case interest coverage ratio falls below 8.50x. The management
and bank has agreed into a contract where EVS Pvt. Ltd. is exempted
from making any payments of debt in the first year of operations. The
terms of loan requires the company to repay minimum of 20% of the
outstanding debt (at the start of the year), starting from its second year
of operations.
For manufacturing Product A, EVS Pvt. Ltd. spent INR 25,00,000 for
buying two machines on the second day of the year 2022. The yearly
capex is estimated to INR 200,000 for 2nd and 3rd year and INR
220,000 for year 4th and 5th. Depreciation is chargeable @12% of the
yearly written down value.
EVS Pvt. Ltd. is expecting to achieve a capacity utilization ratio of 60%,
while 75% of the available goods are expected to be sold in year 2022-
2023. EVS Pvt. Ltd. Is selling all of its goods through a commission
agency, which will be paid 8% of the selling price for each unit sold. The
yearly indirect expenses (rent, salaries, office exp. Etc.) are estimated
be INR 12,60,000.
The goods are sold on credit and the company is expecting to recover
the receipts from debtors in 40 days in the initial year, which gradually
is expected to come down to 30 by the 5th year of the operations. On
the other hand EVS Pvt. Ltd. takes about 60 days to make payments to
creditors (from whom Raw material is purchased to manufacture
products). EVS Pvt. Ltd. has plans to give dividends to shareholders
@25% in any year when net margin is above 10%

Product A
▪ Production Capacity of 100,000 Units, with utilization ratio of 60%,
62%, 64%, 65% and 66% for year 1, 2, 3, 4, 5 respectively
▪ Sales of 75%, 76%, 77%, 79% and 82% of total available units for sale ▪
Selling price of INR 150 per unit is expected to grow @7%
▪ Raw material costs INR 60 per unit, labor expenses @ INR 27 per unit;
expected growth of 5% and 11% respectively

Others:
▪ SG&A to grow @15% for year 2 and 3 and 14% for year 4 & 5
▪ Tax @ 30%
▪ Creditors days to come down to 55 in year 4 and 50 in year 5
▪ Outstanding expenses account for 1.25 months
▪ Debt repayment @30% in year 3 & 4 and 35% in year 5

Please calculate BEP of the Company and assess the efficiency and
profitability of the business calculating various ratios.
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