The Valuation and Financing of Lady M Case Study [PDF]

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The Valuation and Financing of Lady M Confections

Break Event Point Analysis of opening in WTC

Fixed Cost Y1 Rent 310600 Utility 38644 Labour 594750 Contribution / unit 40 BEP units 23600 Cash BEP Selling Price 80 BEP Sales 1888000,00 Including setup cost 5 yrs depreciation Depreciation 200000 Non cash item New fixed cost 1143994 BEP units 28600

Assuming Sales Growth

20% sales growth Revenue CoGS Rent Utility Labour Profit Initial investment uncovered

Y1 Y2 Y3 Y4 Y5 1888000 2265600 2718720 3262464 3914957 944000 1132800 1359360 1631232 1957478 310600 319918 329516 339401 349583 38644 39803 40997 42227 43494 594750 624488 655712 688497 722922 6 148591 333135 561106 841479 999994 851403 518268 -42839 -884317

5% sales growth Revenue CoGS Rent Utility Labour Profit Initial investment uncovered

Y1 Y2 Y3 Y4 Y5 1888000 1982400 2081520 2185596 2294876 944000 991200 1040760 1092798 1147438 310600 319918 329516 339401 349583 38644 39803 40997 42227 43494 594750 624488 655712 688497 722922 6 6991 14535 22672 31438 999994 993003 978468 955795 924357

Assuming the initial capital expenditure of $10,000,000 the growth needed to break event would be

Required growth rate Sales growth reqd Revenue CoGS Rent Utility Labour Profit Initial investment uncovered

13,19% Y1 Y2 Y3 Y4 Y5 1888000 2137038 2418924 2737994 3099150 944000 1068519 1209462 1368997 1549575 310600 319918 329516 339401 349583 38644 39803 40997 42227 43494 594750 624488 655712 688497 722922 6 84310 183237 298871 433576 999994 915684 732447 433576 0

With the growth rate of Revenue from Lady M. Income Statement $4,132,517 in 2012 to $7,491,187 in 2013 is 81,7% already exceeding the needed growth rate to break event point, and EBIT growth of 150% so Lady M. should open the shop in WTC. Value of Lady M Company FCFF Opt 2 Opt 3

EBIT*(1-t)+D&A-Del Capex-Del NWC PAT+D&A-Del Capex-Del NWC Line by line projections in IS

Sales (-)CoGS Gross Profit (-)SGA (-)R&D EBITDA (-)D&A EBIT (-)Tax PAT %Change in Sales

2012 4132517 1303416 2829101 2449200 0 379901 41800 338101 4421 333680

CoGS SGA

2013 7491187 1632722 5858465 4342500 0 1515965 149007 1366958 74191 1292767

Financial Projection - IS projections - FCFF 2014 2015 2016 11000000 13200000 18480000 2397476 2876971,353 4027759,894 8602524 10323028,65 14452240,11 6376493 7519791,365 10342907,91 0 13200 18480 2226031 2790037,282 4090852,195 24750 800000 47124 2201281 1990037,282 4043728,195 770448 696513 1415305 1430833 1293524 2628423 0,4684 0,2000 0,4000

57,97%

Delta Sales Delta NWC

EBIT*(1-t) (+)D&A (-)Del Capex (-)Del NWC FCFF

B

2018 28875000 6293374,835 22581625,17 15583293,61 28875 6969456,554 82293,75 6887162,804 2410507 4476656 0,2500

2019 36093750 7866718,544 28227031,46 19118179,51 36094 9072758,193 108281 8964476,943 3137567 5826910 0,2500

% of Sales 21,80%

Capex Depreciation 5% rise in Depreciation

A

2017 23100000 5034699,868 18065300,13 12697634,89 23100 5344565,243 62370 5282195,243 1848768 3433427 0,2500

Terminal Value perpetuity method

57,97%

56,97%

55,97%

54,97%

53,97%

52,97%

33000 24750 75

1000000 800000 80

55440 47124 85

69300 62370 90

86625 82294 95

108281 108281 100

3508813 68000 1,94%

2200000 42636 1,94%

5280000 102325 1,94%

4620000 89535 1,94%

5775000 111918 1,94%

7218750 139898 1,94%

1293524 800000 1000000 42636 1050889

2628423 47124 55440 102325 2517782

3433427 62370 69300 89535 3336962

4476656 82294 86625 111918 4360406

5826910 108281 108281 139898 5687012

g=4% 73931159,58 WACC = 12% DCF discount 12% Rs. 938.293,51 Rs. 2.007.160,49 Rs. 2.375.183,89 Rs. 2.771.117,09 Rs. 3.226.963,49 Rs. 41.950.525,42 EV (taking PV of cashflows) Rs. 53.269.243,90 Investor investment 10000000 %share 18,8% Debt 1017615 Equity Value 52251628,9 %share 19,14% EBITDA multiple Year 2014 Terminal Value PV EV Debt Equity Value %share

12 26712372,82 Rs. 15.157.317,72 Rs. 26.476.036,19 1017615 Rs. 25.458.421,19 39,28%

Assuming opening in China would worth 1/3 of Equity value,

Values in thousands Perpetuity Model Lady M equity value =

53270*(1/3 =

17756,66667

a) Don't give stake in LMUS b) LMUS retains 25% in LMC = Don’t give stake in LMUS c) LMUS retains 50% in LMC = Should give (10000-9053)/54315

=

Maximum share that can be given

(10000/17757) =

=

13317,5 8878,333333 1,70% 56,32%

So Lady M fully capable of generating a profit and expand its market throughout the world. They should not take Chinese investor offer even if in 2019, the $ 10 million will be 1/3 Lady M equity value, and instead should considering entering the Chinese market, not by franchising.