Module 09 · Solutions

Warm-up

E09.01 Conservative (understated profit; adjust up, watch for released cushions); neutral (use as is); aggressive (overstated; adjust down, weight the bear case); manipulated (target-seeking; heavy discount or avoid); fraudulent (fiction; avoid — equity usually worthless).

E09.02 Pressure (guidance misses, pledges, fund-raising, covenants, bonus metrics); opportunity (promoter control, ornamental audit committee, small auditor, complex structures); rationalisation (not observable — inferred from disclosure tone and "temporary" language).

E09.03 Earnings manipulation (premature/bogus revenue; capitalising costs; under-provisioning; cookie jars; big baths); cash-flow manipulation (financing in CFO — supplier finance, factoring; operating outflows in CFI; one-off boosts); key-metric manipulation (adjusted EBITDA; redefined contribution margins; GMV as revenue; dropped KPIs).

E09.04 Employees/whistle-blowers, media, analysts and short sellers detect most cases; auditors a minority. An unmodified opinion is necessary, not sufficient; external scepticism and the numbers themselves are the earlier signals.

E09.05 See 09.2, 09.3, 09.4 key-terms tables.

E09.06 M = −4.84 + 0.920 DSRI + 0.528 GMI + 0.404 AQI + 0.892 SGI + 0.115 DEPI − 0.172 SGAI + 4.679 TATA − 0.327 LVGI; flag > −1.78. Z = 1.2X₁ + 1.4X₂ + 3.3X₃ + 0.6X₄ + 1.0X₅; < 1.81 distress, 1.81–2.99 grey, > 2.99 safe. Piotroski: ROA > 0; CFO > 0; ΔROA > 0; CFO > PAT; Δleverage < 0; Δcurrent ratio > 0; no equity issue; Δgross margin > 0; Δasset turnover > 0.

E09.07 Interest income ÷ average cash and investments compared with market yields; Satyam's reported interest was a small fraction of what ₹5,000+ Cr of deposits would earn — the cash did not exist.

Core

E09.08 DSO: 64, 57, 61, 70, 84, 96. Growth ratio: FY22 0.43; FY23 1.53; FY24 2.12; FY25 2.41; FY26 2.29. DSRI: FY24 1.15; FY25 1.20; FY26 1.14.

E09.09 Mix: for — solar share tracks DSO; overdues are named state agencies; against — coverage falling is a choice. Credit: for — overdues doubled; "fully recoverable" repeated; against — no write-offs yet. Recognition: for — no contract-balances disclosure; against — order-book burn consistent with execution. Fabrication: for — none; against — cash yield 7.4%, tax rate 25.2%, public tenders. Verdict: mix + credit, with aggressive provisioning; recognition not excluded (60–70% confidence in the verdict; would rise with the contract-balances note).

E09.10 Coverage 20%: extra provision 12.5 − 4.0 = 8.5 pre-tax → PAT −6.4 → EPS ₹14.0. 30%: 18.7 − 4.0 = 14.7 → PAT −11.0 → EPS ₹13.2. 50%: 31.2 − 4.0 = 27.2 → PAT −20.4 → EPS ₹11.7.

E09.11 Incremental capitalisation in year 3 = 180 − 95 = ₹85 Cr; reported EBITDA = 22% × 800 = 176; expensing the increment → ₹91 Cr (11.4%) — below the year-1 margin. The margin expansion is accounting; check whether the capitalised projects launched and whether amortisation has started.

E09.12 Before: 2,400/12 = ₹200 Cr; after: 2,400/20 = ₹120 Cr; PAT +₹60 Cr a year (80 × 0.75) with no cash effect; disclose under Ind AS 8 and compare with peers' lives.

E09.13 Closing = 80 + 12 − 15 − 30 = ₹47 Cr. The ₹30 Cr reversal went to profit — 37% of the opening balance; ask what it was for, why it is no longer needed, and whether the release coincided with a weak quarter.

E09.14 Implied yield = 28/1,650 = 1.7% vs 6–7% market; interest paid ≈ ₹108 Cr on ₹1,200 Cr of debt. The company pays ~9% on borrowings while "holding" cash earning 1.7%: window-dressed, restricted or non-existent cash until specifically explained.

E09.15 Reclassify the programme as debt: net debt 600 + 900 = ₹1,500 Cr; net debt/EBITDA from 0.5x to 1.25x; and restate CFO by the working-capital benefit of the extra payable days.

E09.16 The parent generates cash and lends it to subsidiaries that lose money; consolidated cash may sit in entities the parent cannot upstream or may be transient. Value the group on the subsidiaries' economics (loss- making) and treat the ₹520 Cr of loans as impaired risk; the "₹640 Cr of cash" is not the parent's.

E09.17 DSRI 1.143, GMI 1.020, AQI 0.966, SGI 1.125, DEPI 0.954, SGAI 1.010, LVGI 0.997, TATA 0.022; M = −2.14. Largest contributors to the rise from −2.32: TATA (0 → 0.022–0.035, coefficient 4.679) and DSRI. Hand check: −4.84 + 0.920×1.143 + 0.528×1.020 + 0.404×0.966 + 0.892×1.125 + 0.115×0.954 − 0.172×1.010 + 4.679×0.022 − 0.327×0.997 = −2.14 ✓.

E09.18 X₁ 0.277; X₂ 0.591; X₃ 0.121; X₄ 2,340/437.5 = 5.35; X₅ 1.153. Z = 0.332 + 0.827 + 0.398 + 3.209 + 1.153 = 5.92 — safe. Z″ = 6.56×0.277 + 3.26×0.591 + 6.72×0.121 + 1.05×(706.1/437.5) = 1.817 + 1.927 + 0.813 + 1.695 = 6.25 — safe.

E09.19 FY26: ROA > 0 ✓; CFO > 0 ✓; ΔROA ✗; CFO > PAT ✗; leverage down ✓; current ratio up ✗; no issuance ✓; gross margin up ✗; turnover up ✗ → 4. Lost since FY24 (7): ΔROA (profit fell), CFO > PAT (receivables), gross margin (mix), plus current ratio and turnover. The deterioration is the FY25–26 story in binary form.

E09.20 (c) highest — timing before results; (e) high — director exit right after the audit committee met; (d) moderate — a five-year trend toward the promoter's private entity; (b) low-moderate — small, but purpose is private; (a) none — rotation.

E09.21 All the operator signals: circular volume (5% delivery), connected "public" holders, announcements without revenue, preferential warrants at the floor. Avoid; search SEBI orders for the names; if held, exit into liquidity — the base rate is collapse.

E09.22 Rubric: section scores near A 10 / B 0 / C 3 / D 5 = 18, Amber; the verdict names the receivables cluster, RPT trend and pledge; adjust/discount/monitor/escalate with specific triggers and dates.

E09.23 (a) Red — D2 becomes 3. (b) Still Amber (D1 → 2); a rise above 15–20% or an invocation → Red. (c) Red — A3/A4 become 3 (revenue recognised on a disputed claim). (d) Amber holds but A5 → 2 and the recognition hypothesis strengthens; the next check is contract-asset ageing.

Stretch

E09.24 Rubric: the scheme (e.g., fake distributors buying on 180-day credit; goods "shipped" to a rented warehouse) and its marks — P&L: revenue and gross margin above peers; balance sheet: receivables and inventory rising, cash flat; CFS: CFO ≪ PAT; notes: new large customers, extended terms, related warehouse lessor; tests: DSO/ageing, customer verification, GST e-way-bill volumes vs shipments, dealer checks.

E09.25 Both models take reported inputs; fabricated cash and revenue kept Altman's liquidity and Beneish's indices normal. The catches: interest income vs cash (yield far below market) and the tax paid vs reported profit (and, in Satyam's case, the attempted Maytas acquisition as a use for cash that did not exist).

E09.26 Rubric: criteria coded (pledge > 20%; 3-yr CFO/PAT < 50%; auditor resignation; ASM/GSM; RPT > 10% of costs), applied to a Screener export; a defensible estimate (typically 15–30% of a small-cap universe) with the count by criterion.

Real-world task

E09.27–29 Rubric: scores with the mapping stated; checklist with page references and a verdict; the SEBI order summary identifying connected entities, circular trades, announcements and the public signals that preceded it.