Altman Z-Score : Bankruptcy prediction model

For developed market: Z-Score = 1.2(X1) + 1.4(X2) + 3.3(X3) + 0.6(X4) + 1.0(X5)

High probability of Bankruptcy: Z-Score < 1.81
For emerging market: EM Score = 3.25 + 6.56(X1) + 3.26(X2) + 6.72(X3) + 1.05(X4)
High probability of Bankruptcy: EM Score < 1.75
Coefficients Ratios
Developed Market Emerging Market
= 3.25
+ 1.2 6.56 X1
+ 1.4 3.26 X2
+ 3.3 6.72 X3
+ 0.6 1.05 X4
+ 1 X5
) + 0.6(X4) + 1.0(X5)

2) + 6.72(X3) + 1.05(X4)

Ratios

Constant
Net Working Capital/Total Assets
Retained Earnings/Total Assets
EBIT/Total Assets
Market Value of Equity/Liabilities
Sales/Total Assets
Kwality Ltd.: Information needed to calculate Z-Score / EM Score
(INR million) Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017
Net Working Capital 2,839 3,689 5,330 6,520 9,044
Total Assets 13,733 17,535 20,662 25,493 30,282
Retained Earnings 2,642 4,081 6,431 8,312 10,936
Liabilities 10,887 13,251 14,057 16,958 19,109
Market Value of Equity 6,035 6,411 8,224 25,302 36,980
Sales 39,304 50,150 58,901 63,779 68,855
EBIT 2,106 2,844 3,364 3,929 4,450

Z-Score / EM Score Calculation

Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017

Constant
Net Working Capital/Total Assets 0.21 0.21 0.26 0.26 0.30
Retained Earnings/Total Assets 0.19 0.23 0.31 0.33 0.36
EBIT/Total Assets 0.15 0.16 0.16 0.15 0.15
Market Value of Equity/Liabilities 0.55 0.48 0.59 1.49 1.94
Sales/Total Assets 2.86 2.86 2.85 2.50 2.27

Z-Score 4.22 4.26 4.48 4.67 4.78

EM-Score 6.85 6.99 7.67 8.59 9.41
 Coefficients
Developed Market Emerging Market
3.25
1.2 6.56
1.4 3.26
3.3 6.72
0.6 1.05
1
Probability of Bankruptcy
Low
Low
Beneish M : Fraud detection model
Beneish M: - 4.840 + 0.920(DSRI) + 0.528(GMI) + 0.404(AQI) +0.892(SGI) + 0.115(DEPI) - 0.172(SAI) - 0.327(LVGI) + 4

High probability of Earnings Manipulation: M > -1.78

Coefficients Index

= -4.840 Constant
+ 0.920 DSRI Day's Sales in Receivables Index
+ 0.528 GMI Gross Margin Index
+ 0.404 AQI Asset Quality Index
+ 0.892 SGI Sales Growth Index
+ 0.115 DEPI Depreciation Index
+ -0.172 SAI Selling & Admin Expense Index
+ -0.327 LVGI Leverage Index
+ 4.670 TATA Total Accruals to Total Assets
0.115(DEPI) - 0.172(SAI) - 0.327(LVGI) + 4.670(TATA)

(Receivables/Sales) Yr t/Yr t-1

(Gross Margin/Sales) Yr t/Yr t-1
(Assets excl CA & PPE/Total Assets) Yr t/Yr t-1
Sales Yr t/Yr t-1
(Depn/Net PPE before depn) Yr t/Yr t-1
(Selling & Admin Exp/Sales) Yr t/Yr t-1
(CL + LT Debt/Tot Liab & Equity) Yr t/Yr t-1
(PAT - CFO)/ Total Assets
Kwality Ltd.: Information needed to calculate Beneish M
(INR million) Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017
Prop. Plant & Eq-Net 817 1,278 1,793 2,604 4,393
Accounts Receivable 9,309 13,312 13,246 16,554 15,792
Current Assets 12,593 15,841 17,897 20,913 22,993
Total Assets 13,733 17,535 20,662 25,493 30,282
Current Liabilities 9,754 12,152 12,567 14,393 13,948
Long-term Debt 1,128 1,092 1,476 2,546 5,031
Total Liab & Equity 13,733 17,535 20,662 25,493 30,282
Sales 39,304 50,150 58,901 63,779 68,855
Cost of Goods Sold 36,221 46,185 54,154 58,707 62,670
Selling & Admin. Expense 977 1,121 1,383 1,143 1,736
Net Income 1,056 1,449 1,665 1,640 1,941
Depreciation 103 130 253 234 223
Cash flow from operations (1,097) (136) 170 (114) 1,928

Beneish M Calculation
Mar-2013 Mar-2014 Mar-2015 Mar-2016 Mar-2017
Constant
Day's Sales in Receivables Index 1.12 0.85 1.15 0.88
Gross Margin Index 1.01 1.02 0.99 1.13
Asset Quality Index 1.01 1.98 1.65 1.23
Sales Growth Index 1.28 1.17 1.08 1.08
Depreciation Index 0.82 1.34 0.67 0.59
Selling & Admin Expense Index 0.90 1.05 0.76 1.41
Leverage Index 0.95 0.90 0.98 0.94
Total Accruals to Total Assets 0.09 0.07 0.07 0.00
Prob of Earnings Manipulation
Beneish M -1.68 -1.66 -1.68 -2.45
 -4.840
0.920
0.528
0.404
0.892
0.115
-0.172
-0.327
4.670
of Earnings Manipulation
High
Table 1. Kwaliy Ltd.'s Consolidated Income Statement
(INR million) 2012-13 2013-14 2014-15 2015-16
Revenue 39,304 50,150 58,901 63,779
Material costs 35,980 45,869 53,658 58,100
Employee costs 138 186 243 374
Depreciation 103 130 253 234
Other expenses 977 1,121 1,383 1,143
Profit before Interest and Tax 2,106 2,844 3,364 3,929
Interest expenses 931 1,156 1,403 1,585
Profit Before Tax 1,176 1,688 1,961 2,344
Income Tax 119 239 295 704
Net Profit 1,056 1,449 1,665 1,640
Source: Kwality Ltd's Annual Reports and author's calculations
2016-17
68,855
62,046
401
223
1,736
4,450 2
1,814
2,636
694
1,941
Table 2. Kwality Ltd.'s Consolidated Balance Sheet
(INR million) Mar-2012 Mar-2013 Mar-2014 Mar-2015 Mar-2016
Fixed Assets 641 817 1,278 1,793 2,604
Other Non-current Assets 192 323 417 972 1,976
Current Assets 8,120 12,593 15,841 17,897 20,913
-Inventories 1,001 987 1,874 2,910 1,706
-Trade receivables 6,602 9,309 13,312 13,246 16,554
-Cash & cash equivalents 131 306 315 520 864
-Other current assets 386 1,992 341 1,221 1,790
Total Assets 8,953 13,733 17,535 20,662 25,493

Total Equity 1,810 2,845 4,284 6,605 8,536

-Share capital 203 203 203 219 224
-Other equity 1,607 2,642 4,081 6,431 8,312
Long Term Debt 1,024 1,128 1,092 1,476 2,546
Other Non-Current liabilities 8 6 7 14 18
Current Liabilities 6,111 9,754 12,152 12,567 14,393
-Short term debt 5,501 8,312 9,681 10,885 12,146
-Current maturities of long term debt 156 179 187 123 504
-Trade payables 254 918 1,663 520 521
-Other current liabilities 200 345 621 1,038 1,222
Total Equity and Liabilties 8,953 13,733 17,535 20,662 25,493
Market Value of Equity 7,518 6,035 6,411 8,224 25,302
Source: Kwality Ltd's Annual Reports and author's calculations
Mar-2017
4,393
2,896
22,993
3,514
15,792
1,133
2,554
30,282

11,173
237
10,936
5,031
130
13,948
10,865
721
969
1,394
30,282
36,980
Table 3. Kwality Ltd.'s Cash Flow Statement
(INR million) 2012-13 2013-14 2014-15 2015-16
Cash Flow from Operating Activities (1,097) (136) 170 (114)
Operating profit before working capital changes 2,266 2,960 3,648 4,286
Change in working capital (3,194) (2,842) (3,478) (3,975)
Income tax & extraordinary items (169) (255) (1) (425)

Cash Flow from Investing Activities (281) (586) (1,085) (1,009)

Cash Flow from Financing Activities 1,988 161 1,042 1,338

Changes in Equity (net issuance less dividend) - - 938 250
Change in long term debt 130 (28) 327 1,451
Change in short term debt 2,812 1,368 1,205 1,260
Finance cost paid (931) (1,156) (1,403) (1,573)
Dividend paid (24) (24) (24) (26)
Increase in Cash and Cash Equivalents 610 (561) 126 215
Source: Kwality Ltd's Annual Reports and author's calculations
2016-17
1,928
4,807
(2,427)
(452)

(1,974)

383
764
2,745
(1,281)
(1,739)
(28)
336
Table 4. Peer Comparison
Kwality Ltd. Parag Milk Foods Heritage Foods Prabhat Dairy Hatsun Agro
Revenues (INR million) 68,855 17,307 18,547 13,945 41,976
Revenue growth (%, 5 year) 23.2 14.6 6.1 24.5 21.2
PBDIT margin (%) 6.8 5.1 19.1 9.1 9.0
Net profit margin (%) 2.8 0.3 14.8 3.4 3.2
Asset turnover 2.5 1.5 2.4 1.4 3.1
Return on assets (%) 7.0 0.4 35.0 4.6 9.9
Return on capital employed (%) 17.3 6.3 58.6 9.1 24.3
Return on equity (%) 19.7 1.0 65.4 7.0 46.7
Average days receivables 86 41 4 65 2
Average days inventory 15 78 27 31 30
Current ratio 1.65 1.45 0.80 1.66 0.50
Debt/equity 1.49 0.34 3.83 0.52 1.98
PBIT/Interest 2.45 1.34 34.79 3.23 3.48
P/BV 3.3 3.1 4.1 1.7 22.4
P/E 19.1 402.5 8.6 35.1 58.0
EV/EBIDTA 11.4 23.2 7.4 10.9 22.3
Source: Kwality Ltd. annual reports, Bloomberg, author's calculations
Median
18,547
21.2
9.0
3.2
2.4
7.0
17.3
19.7
41
30
1.45
1.49
3.23
3.3
35.1
11.4
Table 5. Trends in key indicators
2012-13 2013-14 2014-15 2015-16 2016-17
Revenue growth (%) 62.6 27.6 17.4 8.3 8.0
PBDIT margin (%) 5.6 5.9 6.1 6.5 6.8
Net Margin (%) 2.7 2.9 2.8 2.6 2.8
Asset turnover 3.5 3.2 3.1 2.8 2.5
Receivable days 74 82 82 85 86
Inventory days 10 11 16 14 15
Gross current assets/sales (%) 26.3 28.3 28.6 30.4 31.9
Fixed asset turnover 53.9 47.9 38.4 29.0 19.7
Return on capital employed (%) 20.1 20.5 19.6 18.3 17.3
Return on assets (%) 9.3 9.3 8.7 7.1 7.0
Return on equity (%) 45.4 40.7 30.6 21.7 19.7
Dividend payout (%) 1.9 1.4 1.3 1.4 1.2
Current ratio 1.29 1.30 1.42 1.45 1.65
Debt/Equity 3.38 2.56 1.89 1.78 1.49
Debt/EBIDTA 4.35 3.69 3.45 3.65 3.56
Debt-service coverage ratio 1.92 2.05 2.09 2.02 1.72
PBIT/Interest 2.26 2.46 2.40 2.48 2.45
Source: Author's calculations
Table 6. Management guidance
Item Management guidance/ Explanation
Revenue growth Targeted revenue of INR 90 billion by 2020

EBIDTA margin Targeted EBIDTA margin of 9% by 2020

Depreciation The sharp rise in depreciation to INR 238 million in Apr-Jun 2017 from INR
30 million in Apr-Jun 2016 was due to addition of entire capex for the new
unit that was earlier included in capital work in progress to the gross block.

Interest expenses Average interest cost in 2016-17 was 12%.

Capital expenditure There will be annual maintenance capex of between INR 350 to INR 400
million and additional capex on back-end infrastructure between INR 600
million to INR 1 billion.

Receivables Receivable days should decline due to change in business model from B2B
to B2C.

Raising equity The company had got an enabling resolution to raise INR 15 billion by issue
of securities (including equity, debt or hybrid) approved by the
shareholders. However, the management did not mention any specific plan
to raise equity.

Raising debt Outstanding debt may rise in 2018-19 and decline thereafter. The
management targetted reducing the debt-equity ratio to below 0.5 by 2020
and to nil by 2022.

Debt repayment As on March 31, 2017, borrowings due to mature in 2018-19 and 2019-20
amounted to INR 1,488 million and INR 1,525 million respectively.

Summarised based on annual reports, investor presentations and analyst conference call transcripts
Figure 1. Trend in Share Price

Trend in share price

180
160
140
120
100
80
60
40
20
0
Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16

Kwality S&P BSE500 (RHA)

re price

30000

25000

20000

15000

10000

5000

0
-15 Sep-15 Mar-16 Sep-16 Mar-17

&P BSE500 (RHA)