Answer key — Mock 4 (Forensics & sectors)¶
Part A (1 mark each)¶
| Q | Answer | Why |
|---|---|---|
| A1 | b | Revenue recognised before the performance obligation is met (09.1) |
| A2 | b | Year-end factoring is financing dressed as operating cash |
| A3 | b | Real cash earns interest; a low yield on a large balance suggests the cash is not there or not free |
| A4 | b | The cost moves from operating expenses to investing cash flow |
| A5 | b | LODR requires detailed reasons, disclosed to the exchanges (09.5) |
| A6 | b | A probabilistic flag, not proof: ~17.5% false positives in Beneish's sample |
| A7 | b | (Rec/Sales)ₜ ÷ (Rec/Sales)ₜ₋₁ rises when receivables outgrow sales |
| A8 | b | Altman is a solvency screen, blind to fraud |
| A9 | c | 60% × (1 − 0.45) = 33% |
| A10 | b | Related-party transactions are the main leakage channel |
| A11 | b | Current + savings deposits ÷ total deposits (08.1) |
| A12 | a | Provisions ÷ gross NPAs |
| A13 | b | Strips out currency moves |
| A14 | b | EBITDA per tonne compares producers of a commodity |
| A15 | b | VNB ÷ APE |
| A16 | b | An OAI can lead to a warning letter or import alert, blocking US approvals and supply from that site |
| A17 | b | Pre-sales and collections lead cash; Ind AS 115 revenue lags by years |
| A18 | a | Average revenue per user |
| A19 | b | Commodity prices and spreads swing earnings |
| A20 | b | Average AUM × yield |
Part B¶
B1 (12).
(a) (8 marks, 1 per index)
| Index | Working | Value |
|---|---|---|
| DSRI | (210/1,000) ÷ (120/800) = 0.210 ÷ 0.150 | 1.400 |
| GMI | 35.0% ÷ 39.0% | 0.897 |
| AQI | (1 − 910/1,050) ÷ (1 − 720/800) = 0.133 ÷ 0.100 | 1.333 |
| SGI | 1,000 ÷ 800 | 1.250 |
| DEPI | (30/330) ÷ (30/360) = 0.0909 ÷ 0.0833 | 1.091 |
| SGAI | (110/1,000) ÷ (96/800) = 0.110 ÷ 0.120 | 0.917 |
| LVGI | (450/1,050) ÷ (330/800) = 0.429 ÷ 0.413 | 1.039 |
| TATA | (110 − 40) ÷ 1,050 | 0.067 |
(b) (2 marks) M = −4.84 + 1.288 + 0.474 + 0.539 + 1.115 + 0.125 − 0.158 + 0.312 − 0.340 = −1.485. This is above −1.78, so Godavari resembles Beneish's manipulators and warrants investigation — not an accusation.
(c) (2 marks) Against a typical non-manipulator, the extra push comes mostly from:
- DSRI (1.40 against a non-manipulator mean of 1.03). With DSRI at 1.0, M would be −1.85, below the threshold. Check the receivables ageing schedule, the year-end sales pattern, related-party receivables and any change in credit terms.
- TATA (0.067 against 0.018): profit well ahead of cash. Check the working-capital build in the cash-flow statement.
Also accept AQI (1.33), with the check being which "other" assets grew: capitalised costs, loans and advances, or other non-current assets.
B2 (8).
(a) (3 marks) The five ratios:
- X₁ = 200/5,000 = 0.040
- X₂ = 400/5,000 = 0.080
- X₃ = 350/5,000 = 0.070
- X₄ = 900/3,900 = 0.231
- X₅ = 2,500/5,000 = 0.500
Z = 0.048 + 0.112 + 0.231 + 0.138 + 0.500 = 1.03, which is in the distress zone (below 1.81).
(b) (3 marks) Book equity = 5,000 − 3,900 = 1,100, so X₄″ = 1,100/3,900 = 0.282. Z″ = 6.56 × 0.040 + 3.26 × 0.080 + 6.72 × 0.070 + 1.05 × 0.282 = 1.29, which is in the grey zone (1.10–2.60).
(c) (2 marks) The two disagree because Z penalises the low asset turnover every infrastructure developer has (X₅) and uses a depressed market cap (₹900 Cr against ₹1,100 Cr of book equity). Z″ drops turnover and uses book equity, so it suits a non-manufacturer better. Both say the same thing, though: EBIT of only 7% of assets, thin working capital and 78% of assets funded by liabilities. It is weak either way (09.6).
B3 (10).
(a) (3 marks) Supplier finance releases 1,200 × (95 − 60) ÷ 365 = ₹115.1 Cr of payables. CFO before the four items = 260 − 90 − 115.1 − 30 − 40 = ≈ −₹15 Cr, against ₹120 Cr last year. The entire rise, and more, is engineered.
(b) (4 marks, 1 per item)
- Factoring: treat it as borrowing — add ₹90 Cr to debt and take it out of CFO.
- Supplier finance: the bank is paying suppliers for Sindhu, so treat the extra payables as debt. Read the supplier-finance note (09.4).
- Capitalised development costs: compare free cash flow rather than CFO, or treat the ₹30 Cr as an operating cost. Check the capitalisation policy and amortisation period.
- Related-party "advances": treat them as financing from the promoter group, not customer cash, until proven otherwise.
(c) (3 marks) Item 4 worries most. Items 1–3 are aggressive but disclosed and mechanical. Item 4 is cash from a promoter relative's company dressed as customer demand. A brother is a "relative" under the Companies Act, so this is a related-party transaction. It can be reversed at will, and it is the pattern behind round-tripping. Ask:
- Is this company a genuine customer, and for what product?
- Was the advance approved as a related-party transaction?
- Has it been repaid or adjusted after year-end?
B4 (15).
(a) (5 marks, 1 each)
- NIM = 4,200 ÷ 1,20,000 = 3.5%
- CASA = 42%
- GNPA = 2,400 ÷ 80,000 = 3.0%
- PCR = 1,680 ÷ 2,400 = 70%
- NNPA = (2,400 − 1,680) ÷ (80,000 − 1,680) = 0.92%
(b) (3 marks) Constant-currency growth ≈ 6.0 − 1.5 = 4.5%; utilisation = 72,000 ÷ 90,000 = 80%. Utilisation held above ~85% means the bench is exhausted: the margin tailwind from utilisation is used up, and growth now needs hiring, which will pressure margins (08.2).
(c) (4 marks)
- EBITDA per tonne = 1,650 Cr ÷ 15 Mt = ₹1,100/t
- Utilisation = 15 ÷ 20 = 75%
- EV per tonne = 16,000 Cr ÷ 20 Mt = ₹8,000/t
That is about 7% above replacement cost of ₹7,500/t. The market is paying a small premium to building new capacity. That is justified only if the company earns more than its cost of capital on new capacity, which the Indian cement cycle rarely allows for long (08.7).
(d) (3 marks) VNB margin = 2,600 ÷ 10,000 = 26%. Pair it with APE growth, since VNB growth ≈ APE growth × margin, or with the operating return on embedded value (RoEV) (08.11).
Part C (35)¶
1 (8 marks).
| FY22 | FY23 | FY24 | FY25 | FY26 | |
|---|---|---|---|---|---|
| EBITDA | 144.0 | 189.8 | 251.6 | 326.8 | 428.8 |
| Receivable days | 134 | 152 | 170 | 182 | 197 |
| Yield on average cash | — | 5.9% | 4.1% | 2.9% | 2.3% |
| Cost of average debt | — | 12.7% | 12.3% | 12.2% | 12.2% |
| Reported net debt | 100 | 120 | 140 | 180 | 240 |
| Net debt ÷ equity | 0.17× | 0.17× | 0.17× | 0.19× | 0.20× |
| Contingent liabilities ÷ net worth | 10.0% | 21.7% | 34.6% | 43.3% | 50.8% |
Over five years the company reported PAT of ₹690 Cr and EBITDA of ₹1,340.9 Cr, against cumulative CFO of −₹15 Cr. Receivables grew at a 41% CAGR against revenue at 28%.
2 (8 marks). Red flags, in order of severity:
- Auditor resignation citing related-party balances, followed by replacement with a small firm (09.5, signal 1). The one party that has seen the books walked away over exactly the area that matters.
- Cash that earns nothing and is partly not free. The yield on cash fell from 5.9% to 2.3% while fixed-deposit rates are ~6–7%. ₹350 Cr is under lien for a group company. The company borrows at 12% while "holding" ₹810 Cr (09.4, the Satyam test).
- Profit never becomes cash. Cumulative CFO is −₹15 Cr against ₹690 Cr of PAT, and receivable days rose from 134 to 197 (09.2).
- Related-party guarantees have reached 51% of net worth — off-balance-sheet support for the group (09.5).
- Promoter pledge rose from 0% to 38%. The promoter needs money, and a price fall could force selling.
- Dubai subsidiaries sell materials to the parent. This is a channel for inflated costs or round-tripped revenue; check who supplies them and what margin they earn (09.2).
Also accept: margins rising smoothly every year in competitive EPC work — too smooth.
3 (6 marks; any four, 1.5 each).
- The auditor's resignation letter and the company's Reg 30 disclosure: the exact information that was withheld. Also the new auditor's report: any qualification, emphasis of matter or KAM on related parties, receivables or cash.
- The related-party note (Ind AS 24), AOC-2 and the subsidiary financials (AOC-1): the Dubai entities' revenue, margins, receivables and suppliers; balances with group companies.
- The cash and bank note: fixed deposits under lien, margin money, and the beneficiary of the lien. Then the group company's own filings on the MCA portal.
- The receivables ageing schedule (Schedule III): amounts over one and three years, disputed items, and concentration by state government. Also the contract assets note.
- Contingent liabilities: the beneficiaries of the guarantees and their finances.
- Credit-rating rationales: liquidity, group support and any "issuer not cooperating" status.
- Pledge disclosures (SAST Reg 31): the lenders and the purpose of the pledge.
4 (7 marks).
- (a) Net debt excluding the lien-marked deposits = 1,050 − (810 − 350) = ₹590 Cr; ÷ 1,180 = 0.50× (3 marks).
- (b) If half the guarantees crystallise, debt rises by ₹300 Cr to ₹890 Cr and equity falls by ₹300 Cr to ₹880 Cr, so net debt ÷ equity = 1.01× (3 marks).
- Against a reported 0.20×, leverage is five times what the balance sheet shows (1 mark).
5 (6 marks).
- Bull case (2 marks). State governments are slow payers, not defaulters, and many EPC contractors carry long receivables. With an order book of ~3.7× revenue, one year of collections would turn CFO positive and prove the cash real.
- Verdict (2 marks). Avoid. At most, investigate further with no position. The auditor walked away over related-party balances, and the cash, receivables and guarantees all point to value leaving through the group.
- What would change it (2 marks). A full-year audit by a reputable firm with no qualification and complete related-party confirmations, and the ₹350 Cr lien released. A year of CFO above PAT with receivable days falling would be the next test.
Scoring: 70+ move on; 55–69 redo the Module 09 lessons behind your misses; below 55 work through Modules 08–09 again.