Answer key — Mock 5 (Final exam: Kabini Home Appliances)¶
All figures were computed in Python from the data on the exam page. For spreadsheet answers, accept answers within ±2% of these figures if the method is right.
Section A (30)¶
A1 (8).
| FY24 | FY25 | FY26 | |
|---|---|---|---|
| Revenue growth | 9.3% | 12.5% | 11.6% |
| Gross margin | 37.0% | 38.2% | 38.5% |
| EBITDA margin | 11.0% | 11.4% | 11.6% |
| PAT growth | 29.5% | 12.1% | 10.7% |
| ROE (average equity) | 19.6% | 19.4% | 19.0% |
| ROCE (EBIT ÷ average capital employed) | 28.8% | 26.7% | 24.7% |
Capital employed (net worth + borrowings − cash): FY23 ₹472.0 Cr, FY24 ₹592.0 Cr, FY25 ₹736.0 Cr, FY26 ₹892.0 Cr.
A2 (7).
- FY22: receivable days 42, inventory days 70, payable days 60, so the cash conversion cycle is 52 days.
- FY26: receivable days 66, inventory days 78, payable days 54, so the cash conversion cycle is 90 days.
- At 42 receivable days, FY26 receivables would be 2,210 × 42 ÷ 365 = ₹254.3 Cr. That releases ₹145.7 Cr — more than FY26's CFO of ₹93.4 Cr.
A3 (8).
| FY24 | FY25 | FY26 | Total | |
|---|---|---|---|---|
| CFO ÷ PAT | 0.95 | 0.89 | 0.67 | 0.83 |
| CFO ÷ EBITDA | 55% | 49% | 36% | 46% |
| FCF (CFO − capex) | (4.5) | (9.0) | (1.6) | (15.1) |
Funding, FY24–FY26:
- Uses (₹210.1 Cr): dividends ₹138 Cr, the FCF deficit ₹15.1 Cr and interest paid ₹57 Cr.
- Sources (₹210.1 Cr): net borrowing ₹170 Cr (95 → 265), interest received ₹27 Cr and a cash drawdown of ₹13.1 Cr.
Dividends were paid with borrowed money.
A4 (7).
- DuPont (FY26). Net margin 6.26% × asset turnover 1.746 × equity multiplier 1.741 = 19.0%.
- Leverage. Net debt ÷ EBITDA = 119.7 ÷ 256 = 0.47×; interest cover = 201 ÷ 24 = 8.4×.
- The business before the notes (3 marks).
- A branded consumer business with ~19% ROE and a mid-20s ROCE, growing revenue ~11% a year with margins apparently rising.
- Its cash conversion has collapsed: CFO ÷ EBITDA fell from 55% to 36%, receivable days rose from 42 to 66, and free cash flow has been negative for three years.
- The balance sheet is still comfortable, but it is being used to pay dividends. On the headline numbers it looks like a quality compounder; the cash says something else.
Section B (30)¶
B1 (8).
(a) (3 marks) Ind AS 115 treats consideration payable to a customer — here, schemes paid to distributors and dealers — as a reduction of revenue. The exception is payment for a distinct good or service the customer provides, at fair value.
- For the company: some schemes pay for real, separable services, such as in-store display or co-op advertising.
- Against: volume-linked and sell-through schemes are price discounts. They are not distinct services, and the KAM flags exactly this estimate.
Presenting all ₹62 Cr as A&P is aggressive at best. FY24 is also not restated, which breaks comparability.
(b) (3 marks) Revenue on the old basis:
| FY24 | FY25 | FY26 | |
|---|---|---|---|
| Revenue | 1,760 | 1,932 | 2,148 |
| Growth | 9.3% | 9.8% (reported 12.5%) | 11.2% (reported 11.6%) |
| Gross margin | 37.0% | 36.6% | 36.7% |
(c) (2 marks) The "150 bp expansion" is entirely presentation. On a like-for-like basis the gross margin fell about 30 bp over two years, despite the motor plant.
B2 (6).
- Adjusted EBITDA = 256 − 15 = ₹241 Cr, a 11.2% margin on adjusted revenue against 11.6% in FY25, so the margin fell.
- Adjusted PAT = 138.4 − 15 × (1 − 0.2517) = ₹127.2 Cr. That is growth of +1.8%, against a reported +10.7%.
- Warranty provision as a share of revenue: 1.48% (FY24), 1.46% (FY25), 0.77% (FY26).
The question to ask: "Motors carry a five-year warranty, and FY25–FY26 sales include motors from a new plant and a growing share from Kabini Motors. How many years of claims on these motors support a release? What would the provision be at the FY21–FY25 claims ratio?"
B3 (6). The pattern is channel stuffing / loading the channel: pushing stock to distributors on extended credit to meet revenue targets.
Evidence (any three):
- receivable days rose from 42 to 66 while revenue growth was modest;
- the Q4 share of revenue rose from 27% to 29% to 32%;
- credit terms were "extended selectively";
- CFO ÷ EBITDA fell to 36%;
- growth in trade schemes, now hidden in A&P, is consistent with incentives to take stock.
Confirm or refute (any two):
- the receivables ageing schedule (Schedule III), including dealer receivables over 180 days;
- the Q1 FY27 revenue and sales returns, since stuffed quarters are followed by weak ones;
- channel checks on distributor inventory weeks;
- credit notes issued after year-end;
- growth in the allowance for expected credit loss.
B4 (6).
- Related-party motor purchases as a share of cost of materials: 8.0% (FY24), 11.6% (FY25), 14.0% (FY26).
- The own motor plant opened in FY25 and runs at 40% utilisation. Yet purchases from the family company more than doubled. The listed company is paying for capacity it leaves idle while buying from the promoters.
Questions for the audit committee (any three):
- What is the price per motor from Kabini Motors against the internal cost at the new plant and against quotes from unrelated suppliers?
- Why are volumes rising while the own plant is under-utilised, and what is the plan to shift volumes?
- What are Kabini Motors' revenue, margins and other customers? Is Kabini its main customer?
- Who on the committee reviewed the arm's-length test, and was an external benchmark used?
B5 (4). Amber, leaning Red. Accept Red if it is argued. The deciding items:
- revenue presentation that flatters growth and gross margin, together with an opportunistic warranty release;
- deteriorating cash conversion with signs of channel stuffing;
- rising related-party purchases alongside an idle own plant, plus the CFO's resignation in the same year.
Mitigants: an unmodified audit opinion, no pledge, low leverage.
Section C (20)¶
C1 (8).
- Sources of advantage: a regional brand with #2–#3 positions in mature categories, and an 18,000-outlet distribution network built over decades. The advantage is narrow and regional (44% of revenue from the South).
- Erosion:
- E-commerce and quick commerce (18% of sales, doubling) weaken distribution as a moat. Shelf space online is rented, not owned, and price transparency compresses margins.
- Small appliances are outsourced from contract manufacturers — no manufacturing edge, and exposed to white-label and D2C brands.
- "Heightened competitive intensity" and rising schemes show that pricing power is weakening.
Verdict: a modest brand-plus-distribution moat that is narrowing (05.3).
C2 (6).
- Capital employed rose from ₹472.0 Cr to ₹892.0 Cr, an increase of ₹420 Cr.
- Incremental pre-tax ROCE = (201 − 118) ÷ 420 = 19.8%. Excluding the warranty release it is (186 − 118) ÷ 420 = 16.2%. Both are below the 24.7% average, so new capital earns less than the old.
- Net working capital rose from ₹148 Cr to ₹386 Cr, an increase of ₹238 Cr (57% of the capital increase). Fixed assets rose by ₹182 Cr (43%).
Growth is being bought with dealer credit and a plant running at 40%.
C3 (6). Weak.
- Capex of ₹325 Cr went into a motor plant that sits under-utilised while the promoter's company supplies more motors each year.
- Dividends (₹138 Cr) were paid out of borrowing while FCF was negative.
- Reported numbers were made to look better through presentation and estimate changes.
Answer: no, not without evidence that incremental returns and related-party purchasing are fixed.
Section D (40)¶
D1 (4). kₑ = 6.6% + 0.9 × 6.0% = 12.0%. After-tax k_d = 9.0% × (1 − 0.2517) = 6.73%. WACC = 0.95 × 12.0% + 0.05 × 6.73% = 11.74% (use 11.7%).
D2 (14). FCFF = NOPAT − (capex − depreciation) − ΔNWC.
| Year | Revenue | EBITDA margin | EBITDA | NOPAT | Net capex | ΔNWC | FCFF | PV at 11.7% |
|---|---|---|---|---|---|---|---|---|
| FY27 | 2,541.5 | 11.88% | 301.9 | 178.4 | 25.4 | 49.7 | 103.2 | 92.4 |
| FY28 | 2,922.7 | 12.16% | 355.4 | 211.3 | 29.2 | 57.2 | 124.9 | 100.1 |
| FY29 | 3,331.9 | 12.44% | 414.5 | 247.8 | 33.3 | 61.4 | 153.1 | 109.9 |
| FY30 | 3,765.1 | 12.72% | 478.9 | 287.9 | 37.7 | 65.0 | 185.3 | 119.0 |
| FY31 | 4,216.9 | 13.00% | 548.2 | 331.3 | 42.2 | 67.8 | 221.4 | 127.3 |
| FY32 | 4,680.7 | 13.00% | 608.5 | 367.8 | 46.8 | 69.6 | 251.4 | 129.4 |
| FY33 | 5,148.8 | 13.00% | 669.3 | 404.5 | 51.5 | 70.2 | 282.8 | 130.4 |
| FY34 | 5,612.2 | 13.00% | 729.6 | 441.0 | 56.1 | 69.5 | 315.3 | 130.1 |
| FY35 | 6,061.2 | 13.00% | 787.9 | 476.2 | 60.6 | 67.3 | 348.3 | 128.7 |
| FY36 | 6,546.0 | 13.00% | 851.0 | 514.3 | 65.5 | 72.7 | 376.1 | 124.4 |
- PV of explicit FCFF = ₹1,191.7 Cr.
- Year-11 FCFF = ₹416.9 Cr, on NOPAT of ₹545.2 Cr.
- TV = 416.9 ÷ (0.117 − 0.06) = ₹7,313.9 Cr; PV = ₹2,418.9 Cr.
- EV = ₹3,610.6 Cr; equity = ₹3,490.9 Cr.
- Value per share = ₹290.9.
- The terminal value is 67.0% of EV.
D3 (6).
(a) Value per share (₹):
| WACC \ g | 5% | 6% | 7% |
|---|---|---|---|
| 10.7% | 318 | 362 | 430 |
| 11.7% | 263 | 291 | 331 |
| 12.7% | 223 | 241 | 266 |
(b) Reinvestment rate = 1 − 416.9 ÷ 545.2 = 23.5%, so the implied RONIC = 6% ÷ 23.5% = 25.5%, after tax, forever. Kabini's FY26 post-tax ROIC is ~18.5%, and incremental returns are lower still. A more defensible RONIC:
- 15% gives TV = 545.2 × (1 − 0.06/0.15) ÷ 0.057 = ₹5,738.9 Cr and ₹247.5/share;
- 18.5% gives ₹267.5/share.
The base case is therefore generous at the terminal (06.3).
D4 (6). To justify ₹360:
- (a) a steady-state EBITDA margin of 14.9% (against 13.0% in the base case and a like-for-like 11.2% today);
- (b) constant ten-year revenue growth of 14.7% (against ~10% like-for-like history);
- (c) a WACC of 10.7%.
The most plausible route is a lower discount rate plus some margin expansion. Indian consumer franchises routinely trade on low-10s implied discount rates. Margin expansion of ~370 bp from the adjusted 11.2%, while competition intensifies, and 15% growth for a decade, are both demanding. The price embeds "consumer compounder" expectations that the accounts do not currently support (06.6).
D5 (6).
| Reported | Adjusted | |
|---|---|---|
| P/E | 31.2× | 34.0× (EPS ₹10.60) |
| EV/EBITDA | 17.3× | 18.4× (EBITDA ₹241 Cr) |
- Peer median P/E is 36.5×, implying 36.5 × 10.60 = ₹386.9.
- Peer median EV/EBITDA is 23×, implying (23 × 241 − 119.7) ÷ 12 = ₹451.9.
Reconciliation: on multiples Kabini looks 10–25% cheap. But the peers trade at multiples the same DCF arithmetic would not justify either, and Kabini's cash conversion (46%) is the worst in the group (62–78%). A discount is deserved. Trust the DCF's range for value and use the peers to understand the market's mood.
D6 (4).
| Scenario | Value/share | Probability |
|---|---|---|
| Bull | ₹405.8 | 25% |
| Base | ₹290.9 | 50% |
| Bear | ₹139.7 | 25% |
| Probability-weighted | ₹281.8 |
- Expected return from ₹360 = −21.7%.
- Upside to bull = +12.7%; downside to bear = −61.2%. The upside-to-downside ratio is 0.21.
Section E (30)¶
E1 (18). Mark against the memo rubric. A model answer in outline:
- Header: Kabini Home Appliances (KABINI), ₹360, market cap ₹4,320 Cr. Avoid. Value range ₹140–₹406, base ₹291, weighted ₹282. Would revisit below ~₹230. Size 0.
- Market believes: a consumer compounder earning ~15% margins on ~15% growth, or a ~10.7% discount rate.
- Variant perception: like-for-like growth is ~10%, margins are flat to falling, and cash conversion is deteriorating. The quality premium rests on presentation.
- Thesis:
- Adjusted FY26 PAT grew 1.8%, not 10.7% (schemes ₹62 Cr, warranty release ₹15 Cr).
- CFO ÷ EBITDA fell to 36% and receivable days rose from 42 to 66, with Q4 at 32% of sales.
- Related-party motor purchases rose to 14% of COGS while the own plant runs at 40%.
- Valuation table: as in D6, with the reverse DCF from D4.
- Thesis-breakers (dated):
- Q1–Q2 FY27 receivable days back under 50 with no fall in revenue.
- FY27 CFO ÷ EBITDA above 70%.
- Related-party motor purchases falling below 8% of COGS by FY27, with the own plant above 70% utilisation.
- Forensic summary: Amber/Red; reported PAT adjusted down 8%.
- Sizing: none at ₹360.
E2 (6). Buy price = 0.8 × 290.9 = ₹233.
- (a) Bear-case loss = 139.7 ÷ 233 − 1 = −40.0%. Max-loss size = 3% ÷ 40% = 7.5%.
- (b) Returns from ₹233: −80%, −40.0%, +24.9%, +74.2%, with probabilities 10/20/45/25%. Full Kelly = 0.50, so quarter-Kelly = 12.6%.
- (c) min(12.6%, 7.5%) = 7.5%.
- Amber overlay: halve to 3.75%, i.e. ₹3.75 lakh of ₹1 Cr.
- New position: start at half that (~₹1.9 lakh) and add on a positive thesis-breaker.
- Liquidity is not binding: 20% of ₹14 Cr is ₹2.8 Cr a day.
- If you rated Kabini Red in B5, the answer is zero. Full marks for either, if consistent.
E3 (6).
- F&O eligibility: check NSE's current list of F&O securities and SEBI's eligibility criteria, which cover market capitalisation and turnover rank and market-wide position limits.
- (a) Implied mean absolute move = 25 ÷ 360 = 6.9%; 1σ ≈ 6.9% ÷ 0.8 = 8.7%.
- (b) Expected absolute move = 0.6 × 3% + 0.25 × 15% + 0.15 × 6% = 6.45%. Expected signed move = −3.75% + 0.9% = −2.85%.
- (c) There is no edge in event volatility (6.45% against 6.9%), so a long or short straddle is a coin-flip less costs. The edge, if any, is directional and skewed to the downside.
- The fitting structure is a put spread — buy a put near the money, sell one near the bear-case reaction (~₹310). This defines the risk and cheapens the trade by selling the unlikely deep tail.
- Holding no stock and recommending Avoid, "no trade" is also a full-marks answer if argued.
- (11.7.)
Scoring: 125+ distinction; 105–124 pass, then go to the capstone; 90–104 redo the modules behind your weakest section; below 90 retake Mocks 1–4 first.