By : Nitin
To : Satish
Opening description: Client wants to invest in either Hyd Jets – football team or Hyd Heroes – hockey team. Objective is to maximize profit. Pl help him decide which one to pitch for.
1. Opens by asking about scope of the teams. Is told that the teams are part of India national league.
2. Secures clarification that the team has to be purchased. Determines no constraints on the investment monies available with client.
3. Criteria of profitability is Profitable in yr 1.
4. Defines the problem as – ‘Which team should client purchase to ensure profitability in yr 1’
Defines a structure as follows. Will:
- Identify cost structure of the business
- Identify the revenue drivers
- Identify the cost involved to purchase / maintain the team
Secures agreement from Nitin ... is told to proceed.
5. Scopes the sources of revenue first.
- tournament prize revenue
- sponsorship revenue
- ticket revenue
- parking revenue
- refreshment sales
6. Lets scope tournament prize rev first… then runs into an issue that this is not a sure source of revenue and hence pulls back – Wrong strart!!
7. Lets move to ticket revenue. Gets this data from Nitin….
a. Football matches: 30 nos x 65/ticket x 50,000seats x 70% capacity util
b. Hockey matches : 40 nos x 130/ticket x 20,000seats x 70% cap util
Ok.. give me a min to work out the nos of revenue.
8. What is the price of each team; is told that 100mln per yr is payable as the cost for each team. Secures clarification that this is annual fee.
9. We find that both are profitable, but football is more profitable.
10. ok…. So we take football, but what else can we do??? This question is posed by Nitin.
a. Hockey has more pricing power, explore elasticity of hockey demand; can we drop hockey prices slightly and secure additional revenue.
b. Football has more volume; explore elasticity again; can we raise football prices slightly and generate additional revenue.
c. Optimal can be determined – Marginal Cost = Marignal Revenue
i. Simple case - 5 on a scale of 10.
ii. Too long with the calculations.
iii. The wow section - point 10 - was not scoped enough. This is where there e3xists opportunity to make a diff in this case and Satish could have scoped this further.
By : Sudipto
To : Nitin
Client is a large conglomerate. Has experienced an increase in road accidents and the CEO is concerned about the loss of life leading to low morale. Further, for a fatality the CEO loses his bonus! 20 fatalities last year. Wants us to develop a plan to reach zero fatalities over 1 yr.
Is a bit flummoxed to start with, but then proceeds bravely.
1. Goes through the initial scoping about the company type, scope of accidents, location of accidents.
Defines the problem without any additional relevant information being added.
Obs: could have queried the relation between accidents and fatalities. Not doing this made him equate fatalities to accidents and subsequent analysis was on the lines of Zero accidents.
Strucuture definition... asked numerous questions, without formulating a definite framework....
Obs: A slightly ambiguos case and none of the usual structures would be applicable here. Best to take a common sense approach.... Possible structure...
- understand cause of accidents
- understand cause of fatalities and correlation between accidents & fatalities
- identify possible solutions to bridge gaps
- explore feasibility of solutions to yield results in 1yr
Scopes the problem as:
What work leads to road travel. Is told that various reasons - market visits, factory travel, visits to warehouses etc lead to road travel.
Intercity – This is where the accidents happen which means highway
Intracity – None
Secured a clarification that the issue is with intercity travel.
Are accidents in one particular geography? Was told that there is no pattern and that we should assume equal incidence across India.
Causes of accidents...? was told..
45% Our driver at fault or other driver at fault
25% Poor visibility, low illumination - drive at night, fog.
10% Mechanical failure - brakes, tyres etc.
20% Driver fatigue - drive for 3hrs + at a stretch.
Obs: Stopped at reasons for accident; did not develop this to reasons for fatality. This was due to a weak structure upfront that did not capture this.
The case proceeds along and Nitin gets to some good recos as
- Certified agents for car hire / Training of drivers / Audits of cars by independent personnel to certify the vehicles / No travel at night / SAfety awareness training of employees / Policy on distance of travel etc.
Takeaway: A bit unconventional; difficulty level 6/10; key is strucutre, the rest flows seamlessly if that is in place.
24th Dec., 2007
Client is a Angel Investor (AI) with a lot of money. Has been advised that the KPO business in India has opportunities. Has also been told that Registrars in the USA can be bought out. Needs help on a plan to evaluate the KPO opps.
Opens with asking
- what is the exit criteria of profit? Is told that inv needs a exit multiple of 4 in 4yrs. Thus investment should be worth 4 times in 4yrs!!
- What are registrars? Is told that these are manual intensive ops in the US and that these can be relocated to India.
Defines the problem as – ‘Client needs to a plan to evaluate if transferring Registrar ops to India thus creating a KPO operation will return 4 times investment in 4yrs time’.
Structure - ????
Can I know something more about Registrar ops? Is told that they maintain record keeping and documentation for the Mutual funds (MF).
What is the revenue stream for registrars? Is told that fees are based on no of people deployed to a MF. Contracts are for 5 – 15yrs. The no of people deployed are based on volumes.
What are the charges per person? $60,000/person/yr
What are the costs per person? $30,000/person/yr direct and $20,000/person/yr indirect. Thus margins are $10,000/person/yr.
Determines that MFs would be keen to get lower prices!!
How many people does a typical registrar exist in the US?
A clarification – why does AI need to buy out? Is asked why do you think so? Says that long term contracts make customer acquisition easy and also access to the legal knowledge.
So how much does a registrar company cost? What do you think??
Ok… we have margins of $10,000 per person per yr. Tax rate of 40%, thus Net Income per person is $6000 / yr/person. Thus for 200 people, we have 12,00,000 /yr. With a valuation multiple of 10, the firm is valued at $12mln.
So a typical firm will cost $12mln.
Now what are the charges when we move to India? Is told that you can charge $35,000/person/yr for off shore ops and costs are $15,000/person/yr.
Thus margins are post tax = $12,000/person/yr
Can we move all people to India? No, 50 people / 200 people will continue in USA.
Thus net margin = 0.25 x 6000 + 0.75 x 12000 = $10,500/person/yr
What is the applicable valuation multiple? Inv sources say that 16 – 24 multiple is possible. Ok…. So expected valuation will be 10,500 x 200 x 20
Thus actual investment will be = 10,500 x 20 / 6000 x 10 ~ 3.5 times
So is there an opps for future growth? Is told that yes this can grow as we will get more customers in future… hence future cash flows can come through soon in ~ 2yrs…
Ok… so possible to reach 4 times in 4 yrs…
Hence, we should go for this opprtnity…. Will meet the AI criteria…..
Takeaway: Structure was the weak link.
- No industry analysis done. Preferred mode for structure could be as:
…… to be done..