Module 03 · Solutions

Warm-up

E03.01 (a) Annual report — borrowings note (lenders, security, rates, maturity); also the rating rationale. (b) Annual report — related-party note (Ind AS 24) and AOC-2. (c) Concall transcript / investor presentation. (d) The credit-rating rationale (agency website). (e) DRHP/RHP — capital structure and "history of equity share capital" / pre-IPO placement sections. (f) Form 10-K, Item 1A.

E03.02 Unmodified/clean: statements are fairly presented. Qualified: fairly presented except for a specific matter (read it — it can be material). Adverse: not fairly presented. Disclaimer: the auditor could not obtain enough evidence to form an opinion. Anything but unmodified is a serious signal; a "material uncertainty related to going concern" paragraph can sit with an unmodified opinion and matters as much.

E03.03 A KAM is an area the auditor judged most significant in the audit, with what was done about it. Auditing standards presume revenue-recognition fraud risk, so revenue KAMs are routine; what matters is the specific matter (e.g., recoverability of receivables from named customer types) and whether the language has changed from last year.

E03.04 EoM: a paragraph drawing attention to a matter properly disclosed (e.g., a pending litigation) — not a qualification but read it. CARO 2020: the auditor's annexure answering ~20 specific questions (fixed assets, inventory, loans to parties, defaults, fraud, cash losses…). AOC-1: statement of subsidiaries'/associates' financials. AOC-2: disclosure of related-party contracts not at arm's length or material. BRSR: Business Responsibility and Sustainability Report (ESG disclosures, top 1,000 companies). MR-3: secretarial audit report.

E03.05 Quarterly financial results (standalone and consolidated; segment results) within 45 days of quarter-end, subject to limited review by the auditor; annual audited results within 60 days of year-end. A limited review is a lower-assurance procedure (inquiry and analytics) than an audit.

E03.06 YoY compares with the same quarter last year (removes seasonality; misleading across a base effect such as COVID or an acquisition); QoQ compares with the prior quarter (shows momentum; misleading for seasonal businesses — Kaveri's Q2 vs Q1); YTD cumulates the year (smooths; hides a bad latest quarter).

E03.07 Risk factors and litigation (what management is legally required to admit); the financial section (restated statements and KPIs, with the "basis for offer price"); and the capital-structure/pre-IPO history (who is selling, at what prices they bought). They reveal what the marketing sections omit.

E03.08 Expenses by function (COGS, SG&A) vs by nature; Item 1A risk factors and Item 7 MD&A are more substantive than Indian MD&A; quarterly 10-Qs include full balance sheets and cash flows; proxy statements (DEF 14A) disclose executive pay in detail; 8-Ks disclose material events within four business days; US GAAP differences (LIFO, R&D expensing, no impairment reversal).

Core

E03.09 Model: auditor's report and CARO (15 min: opinion, KAMs, EoM, CARO iii/iv/ix); notes — RPTs, contingent liabilities, borrowings, receivables ageing, revenue policy, tax reconciliation (40 min); financial statements with prior-year comparison (20 min); MD&A and segment discussion (20 min); Board's report — remuneration, AOC-2, auditor changes (10 min); shareholding and pledge data (5 min); chairman's letter last (10 min). Rubric: the auditor's report first; the letter last; a total near 120 minutes.

E03.10 (a) Contingent: GST demand ₹38 Cr; income-tax disputes ₹11 Cr; bank guarantees ₹96 Cr. Question: basis of the GST classification dispute and precedent; how much of the BGs relate to unexecuted tenders. (b) RPT: purchases from Kaveri Castings ₹89.2 Cr (10.4% of materials). Question: the supplier's margins and pricing basis. (c) Ageing: receivables > 6 months ₹62.4 Cr vs ECL ₹4.0 Cr. Question: which agencies, expected timing, why coverage is 6%. (d) SAST: 6% promoter pledge (Nov-2025). Question: purpose, lender, LTV, plans to release.

E03.11 Questions: what proportion of the > 6-month balance the auditor tested for subsequent collection; whether independent confirmations were obtained from the state agencies; how the ECL model's assumptions (loss rates, forward-looking adjustments) were challenged. Worrying wording: "relied on management's representations", "subsequent collections were limited", or a KAM that has been upgraded to an EoM or qualification.

E03.12 Rows (from the running example): May-2025 — FY26 growth 15–18% → 12.5% (miss); May-2025 — margin 15%+ → 13.8% (miss); May-2025 — receivable days to 70–75 → 96 (miss); May-2025 — capex ₹40–45 Cr → ₹52 Cr (miss); Nov-2025 — dues clearing in Q4 → overdues rose (miss); May-2026 — FY27 growth 15–18%, margin 14–15%, days 75–80 → Q1: +3.5%, 12.6%, not disclosed (early miss). Score: 0 of 6 delivered.

E03.13 "Could you give receivable days and the > 6-month overdue amount at 30 June, which you disclosed in earlier presentations?" Follow-ups: "If the number isn't to hand, will you file it as an exchange clarification?" and "Has the ECL provision been increased in Q1, and what coverage does it now represent of the overdue bucket?"

E03.14 Calibrated growth = slowing growth (check volume growth vs prior quarters). One-off in nature = a cost that may recur (check the exceptional-items history). Cautiously optimistic = no visibility (check order inflow). Fully recoverable = not yet collected and not provided (check ageing and coverage). Selective on states = losing or declining tenders where payments are slow (check solar order inflow and the state mix).

E03.15 Without collections: (560 + 400)/1,100 = 0.87x — sources alone do not cover 12-month repayments; with expected collections (~₹2,500–3,000 Cr a year on a 34-month-tenor book), coverage is comfortable, which is why the positive ALM mismatches matter. The rating would change if bank lines were cut or if collection efficiency fell (credit stress), turning positive mismatches negative — both named as sensitivities in a good rationale.

E03.16 Hidden: FY28E EPS of ₹18 (implies ~9% EPS CAGR from ₹15.1 — what growth and margin path?); the 30x multiple (why 30x — peers, history, justified P/E at what growth/RoE/cost of equity?); a two-year horizon with no discounting; no scenario range; and the recommendation's independence (coverage history, banking relationships). Ask for the model's drivers and reverse-engineer the implied growth (06.6).

E03.17 (1) 60% of the issue is an exit by the PE investor — the seller sets the price and timing. (2) The pre-IPO placement at ₹350 six months earlier vs ₹600–630 now: a 70–80% mark-up with no corresponding change in the business is a valuation flag; check what changed. (3) EV/Sales vs global peers implies no comparable Indian profits to anchor on — likely loss-making or thin margins (07.4). (4) Fresh-issue objects: what the ₹800 Cr funds, and whether debt repayment dominates. (5) Lock-in expiries and the post-listing float — supply timing.

E03.18 Other operating revenue: export incentives (policy-dependent), scrap sales, job-work charges — inside revenue from operations, so they inflate "growth" if they rise; separate them for organic growth. Other income: interest on deposits, profit on land sale (or exceptional if material), dividend from a subsidiary in standalone accounts. Growth should be measured on core product/service revenue.

Stretch

E03.19 Model paragraph: "Trade receivables increased in line with the growing share of institutional solar business, where contractual payment cycles with state agencies are longer than in our dealer channel. The Company has a strong track record of recoveries from government customers and continues to engage actively with the two agencies that account for the majority of dues beyond six months. Management is confident of substantial recovery in FY27 and has maintained adequate provisions in line with its expected credit loss policy." Annotations: "in line with" — receivables grew 2.3× revenue growth; "track record" — no data; "majority of dues" — ₹62 Cr, doubled; "confident of substantial recovery" — said last year; "adequate provisions" — 6.4% coverage, down from 10%.

E03.20 Reliability: (a) the ageing note is audited and quantified — highest; (d) the rating rationale is third-party but relies on company data and lags; (c) a competitor's call describes the same states' payment behaviour without the incentive to flatter Kaveri — high for context, not for Kaveri's specific numbers; (b) the company's call is the least reliable on judgement ("fully recoverable") but the only source for management's intent. Use (a) for the number, (c) to test whether the problem is systemic, (d) for the lender's view, (b) for the say-do table.

E03.21 Model calendar: April–May — Q4 results, annual guidance, AGM notice (2 h); June–July — annual report (2-hour read + notes extraction), rating rationale update (3 h); July–August — Q1 results and call (1 h); October–November — Q2 results, half-yearly balance sheet (receivables), call (1.5 h); January–February — Q3 results, call (1 h); continuous — exchange announcements, SAST/PIT filings via alerts (15 min/month); annually — shareholding pattern review, Board's report remuneration and AOC-2 (1 h).

Real-world task

E03.22–25 Rubric: opinion and KAMs correctly identified; RPT table with percentages; ageing computed; lenders and maturity ladder listed with rates; contingent liabilities as % of net worth; say-do table with ≥ 6 rows and scores; rating summary with sensitivities and a comparison to your own borrowings read; DRHP KPI comparison with dropped KPIs named.