Case 1: Druthers Forming

Limited
Case Analysis by Group 7

024019: Gurbani Kaur Arora

024031: Pallavi Dureja
024041: Rohit Rai Saxena
024043: Sanchi Monga
024048: Shubham Gera
024065: Arpit Kumar
Analysis of Cash Flow Statement
Analysis of Financial Ratios
Analysis of Financial Ratios
Projection of Statement of Earnings
Projection of Balance Sheet
 Druthers Future Financial Requirements
1. It will require to finance the loan from Bank of Ontario and Canadian Commercial Bank
2. It might need to invest in equipment, furniture & fixtures and fitting &forms for expansion in operations
3. It will require to maintain building as well as fixed assets it owns for undisturbed business operation
4. It might require additional space and so undertake construction of room in 1,500 sq. ft. area where it will
operate
5. Acquisition of customers will require additional efforts for which marketing expenses might need to be incurred
6. It may feel the requirement of short term finance to manage working capital by extending days of credit to
customers
7. Unsold inventory may require Druthers to take short term loans to pay its suppliers
8. Laying off labour may require it to incentivize work force to bring them back from competitors for carrying out
work
9. Any charges on Druthers assets being levied due to default by Sheppard Homes under related party transactions
would require funds
10. In case property on rent gets vacant, it will require funds to undertake its business operations smoothly
 Analysis of Cardinal Principles of Lending
Character
● Druthers Forming Limited was the 2nd family run business of the
Sheppards’ after Sheppard Homes. Druthers’ business that came from
Sheppard Homes was somewhere in the range of 30-70% varying every
year and the rest business came from its services to housing contractors and
individuals.
● Management team of Druthers comprised of Garrett Sheppard who served Analysis
as the president of the local Homebuilders’ Association for years, Norm
Sheppard who provided his architectural expertise and Jack Sheppard who Druthers is of strong character and can be
served as the site manager. relied upon for credibility but has very few
● The company was insulated from economic swings as its services business opportunities of expansion due
complemented both boom and downturns in the economy. to its strong dependence and relation with
● Company had a strong reputation and a loyal customer base. Suppliers
Sheppard Homes. They lack adaptability to
gave 30-60 days credit terms which Druthers also gave to its customers.
new business openings.
● However, finding new customers was tough due to its strong engagement
with Sheppard Homes, a competitor to other home developers.
● Its growth into commercial construction was an infeasible expansion due to
usage of concrete block foundations.
 Analysis of Cardinal Principles of Lending
Capacity
● Druthers is insulated from economic swings as it caters to construction of
both Sheppard Homes (single-family homes) and multi-unit homes.
● It had a capable management team of brothers. Garrett Sheppard had served
as the president of the local Homebuilders’ Association for years. Norm
Analysis
Sheppard’s architectural expertise were appreciated by the customers. Jack
Sheppard served as the site manager. This way brothers’ capabilities
complemented each other and benefited the business. Druthers are building capacity.
● It has $53,994 value of long term loan from Bank of Ontario secured by Furthermore, information on
equipment, furniture and fixtures and $58,084 value of current accounts related party transactions with
payable. Sheppard Homes has to be drilled
● Sales were expected to rise by 10-15% due to decline in the prices of raw into for a better analysis. Their
materials. It cannot afford the sales to dip by maximum of 17% in 2008 and 28% expenses completely wipe their
in 2009. Liquidity was manageable because about 85% of the receivables were income and rent is the sole source
to be recovered from Sheppard Homes, first business of the Sheppards’.
of profit.
● 4,000 sq. ft. of 5,500 sq. ft. property was expected to generate a rental income
of $60,000 and the remaining 1,500 sq. ft. which was capable of incorporating
additional rooms would not only serve the purpose of expansion of Druthers but
also save $20,000 annually. Rental income is their only source of profit.
Analysis of Cardinal Principles of Lending
Capital
● Druthers has $53,994 value of long term loan from Bank of
Ontario secured by equipment, furniture & fixtures and
forms & fittings. Analysis
● Shareholders’ Equity consisted of $6 Common Stock and
$302,109 Retained Earnings Druthers major shareholding comes from
● Druthers is the 2nd business of Sheppards’ after Sheppard retained earnings $302,109. It’s combined
Homes and serves Sheppard Homes in the range of 30-
long term loan if granted by Canadian
70%, varying each year. There is a sure effect of one
Commercial Bank will be $403,994
business on the other as both are wholly run family
($53,994+$350,000). Debt to Equity ratio
businesses dependant on each other.
● Return on Equity has been decreasing since 2005 and will be 1.34 which is well within the limit.
growth on equity has become negative from 0.3% in 2005-
06 to -4% in 2006-07.
Analysis of Cardinal Principles of Lending
Collateral
● The new building after construction will be valued for
$350,000 and be depreciated on a straight-line basis for 20 Analysis
years.
● Net Fixed assets are worth $74,070 and land is worth Druthers have fixed assets available for
$49,070. Long term loan worth $53,994 from Bank of liquidation if required in case of default.
Ontario is secured by equipment, furniture and fixtures.
However, an appraisal is required to
● Sales are expected to rise by 10-15% and future customer
understand related party transactions of
relations can serve as a probable source of cash flow
generation. It cannot afford the sales to dip by maximum of
Druthers and Sheppard Homes to identify
17% in 2008 and 28% in 2009. any charge on Druthers assets for Sheppard
● Rental income of $60,000 is expected to be generated. The Homes’ default.
agreement can serve as a credible source of revenue.
Analysis of Cardinal Principles of Lending
Conditions
● The purpose of requesting loan was to fund construction of Analysis
a new building which will be used to carry out expansionary
operations of Druthers. Druthers have a convincing reason for loan
● Majority (4,000 sq. ft.) of the land (5,500 sq. ft.) will be
request. It is a good debt and the owners
rented out and earn a rental income of $60,000. The
have arranged for fixed income source from
remaining land of 1,500 sq. ft. will be used by Druthers.
●
the property by renting the premises.
The building has a capacity to incorporate development of
additional rooms if required. However, sales of Druthers has dipped
● Sheppards were Canadian Commercial Bank’s long-time significantly in 2007 because of which Bank
customer. Henceforth, the bank is aware of the intention and must make necessary recovery route
solvency of the Sheppards. available in case of default.
Analysis of Cardinal Principles of Lending
Cash Flow
● It has positive operating cash flows of $129,390
which highlight that it has sufficient liquidity from its Analysis
business even after generating a loss of $12,100 in
the year 2007. It’s position has improved Druthers has a good cash flow position
considerably from the year 2006. justifying its intention of expansion and
● It has negative investing cash flow of $68,204 which communicating its ability to finance loan
highlights that it is utilizing its resources to further obligation. However, its major source of
expand its operations. It hints better future cash flow profit is rental income coming from non-
position. operating activities.
● It has negative financing cash flow of $15,212 which
is mainly due to outflow for previous loan financing.
Analysis of Cardinal Principles of Lending
Creditworthiness
● It has a loan of $53,994 from Bank of Ontario on its
book which is being financed since 2006. Complete Analysis
details of interest and principal payment and timing of
payments is not available. Given information highlights Druthers
● Druthers is run by Sheppards who are a long-time credibility and good intention of carrying
client of Canadian Commercial Bank. Thus, the bank business and maintaining relation with the
is well aware of credibility of the Sheppards. stakeholders. Its relations with Sheppard
● The company has strong reputation and loyal Homes is under doubt because of which it
customer base.
is facing issue of attracting business from
● Suppliers also provide Druthers with 30-60 days
new customers.
credit period. It has been paying its suppliers
efficiently within the credit period made available.
 Alternate Options available to the Lender
Grant the Loan
Reject the Loan

Since Garett Sheppard (Druthers) has been a long-time CCB

This seems to be a feasible option for the bank, considering
customer and the company has a good past credit record, not failed
Druthers’ Net Income in the year 2007 ($12,100 Loss). Having no
to any long-term loan obligation. Granting loan option can be
assets to offer as security. Cash flow statement also doesn’t seem
looked upon, with different terms and conditions and options as
to be favourable for Druthers. If rental income is wiped out, the
such :
company will struggle to meet loan obligations. Operating
Income will not be enough to cover the interest. Thus, it will be
a) Granting only partial amount
very risky to grant loan at this moment.
Instead of granting the entire $350,000 loan, partial amount can be
granted in accordance with the financial projections.
Defer the Loan
b) Granting with treating Building as collateral
In case of failure of repayment of loan, building will be able to meet
It is very tough to decide the future outlook of Druthers Forming
the loan obligations.
Limited at this moment. MacDougall can suggest to defer this
c) Granting with Proof of Rental Income
loan request and ask Mr. Sheppard to provide more reliable
Since Druthers is planning to rent out majority of the space to
supporting documents and projections. It can be suggested to
Barron Best Club (4000 sq. feet approximately), then proof of rental
wait for 6-8 months, so as get things get clear and it gets easier
income can be provided for considering loan request
for the both the parties to come to a conclusion.
Final Decision on Whether to Lend Fund or
Not
Final Decision should be not to lend funds to Druthers Forming Limited, due to the following reasons :

● Inability to decide future outlook of Druthers Forming Limited at the moment

● Negative Income in the year 2007
● No assets to offer as security
● Unfavourable Cash Flow Statement
● Inability to meet loan obligations, in case of no rental income
● Operating Income not enough to cover interest
● Druthers Forming Ltd is highly dependent on Sheppard Homes Ltd in case of seasonal businesses
● Druthers is losing customers and there is very less innovation
 Key Takeaways from Analysis of Corporate
Lending
Several pointers have to be kept in mind by the lender so that the
loan does not turn out be NPA for them :

1. Identifying the purpose of the business loan Several pointers should be kept in mind by the borrower
as well before putting out loan request to the lender :

2. Assessing the seven Cs thoroughly

1. Evaluating the need for taking loan and assessing
a. Character
b. Capacity all other alternative options of raising funds
c. Capital
d. Collateral 2. Calculating capacity for collateral
e. Conditions
f. Cashflow
g. Creditworthiness 3. Understanding the interests and charges it carries

1. Proper Valuation of security (which is going to be pledged, 4. Maintaining good credit history and proper
hypothecated or mortgaged) should be done financial documents
2. Legal Opinion should be taken. Pre and Post-sanction visits
should be made.

Several pointers should be kept in mind by the borrower as well

Case 2: Pidilite Industries

Case Analysis by Group 7

024019: Gurbani Kaur Arora

024031: Pallavi Dureja
024041: Rohit Rai Saxena
024043: Sanchi Monga
024048: Shubham Gera
024065: Arpit Kumar
Q1. Discuss the framework for credit quality analysis for a target company

Credit analysis is a business activity that evaluates the credit worthiness of an organization. It is an
important tool that is used by many investors, lenders and other stakeholders to assess the current
position and performance of the company with assessing the effectiveness of the internal controls that
has been put in place by the management. The credit analysts assess the confidence level of the
management, credit history and the company for the current as well as the coming business financial
obligations and based on the same the credit rating has been assigned to the company.

In the given case, the Pidilite industries has been recommended by the equity analysts as a long-term
investment opportunity.
Q1. Discuss the framework for credit quality analysis for a target company

Credit Analysis is assessed by considering the following factors:

Character
Pidilite has established a leadership position on account of a strong product portfolio and well-established network and
was able to keep its stakeholders satisfied. Pidilite innovated and delivered an array of products over the years through
its new product schemes, in-depth understanding of consumer needs, and cutting-edge technology.

Capacity
Both secured and Unsecured Loans were reduced over the period of time indicated repayment capacity of Pidilite

Capital
Capital has increased over the years along with increased product schemes, research and development and profits of
the company thereby building trust on the the company.). Over the past five years (FY 2010/11 to FY 2014/15), the
company consistently created value for shareholders by recording a CAGR of almost 15 per cent in its dividend payout
and 33.6 per cent CAGR in its market capitalization
Q1. Discuss the framework for credit quality analysis for a target company

Collateral
Pidilite holds sufficient capital and assets to be considered for loans

Conditions
Pidilite is in a stable environment and is on its way to expansion and growth. Through its sustained investments in
developing innovative brands, Pidilite was able to achieve cost management and process efficiencies in its operations.

Cash Flows
Cash flow generation is healthy for Pidilite and due to its steady growth and margins, the company’s operating cash
flows grew at a CAGR of almost 13 per cent between FY 2010/11 and FY 2014/15

Creditworthiness
Financials for the company have improved over time and so has the management outlook thereby improving the
creditworthiness of the firm Through the help of the above analysis one can easily determine the ability of the company
to meet out its short term and long-term obligations and maintain the level of solvency.
Q2. Discuss the parameters for evaluating the company’s credit quality and risk profile

These are the different components that can be used to measure the credit quality and risk profile of a company.
Some of these as mentioned in the case study where Mr Chamaria was to use them to evaluate Pidilite include:

1. Liquidity: Measures the amount of cash available as well as the extent to which current assets can be converted
into cash in order to meet the company’s obligations. Before a company can prosper in the long term, it must
first be able to survive in the short term. The two most used liquidity ratios include;
● Current ratio
● Quick Ratio

1. Solvency Ratios: Company's ability to meet its debt obligations on an ongoing basis, not just over the short
term. Solvency ratios calculate a company's long-term debt in relation to its assets or equity
● Debt Service Coverage ratio
● Interest Coverage Ratio

Given the strong cash flow generation, the company was able to fund its capital expenditure plans largely with internal
accruals and without any excessive reliance on outside debt.
3. Operating Efficiency: A company's operating efficiency is key to its financial success and is the best indicator of its operating
efficiency. This metric indicates not only a company's basic operational profit margin, but it also provides an indication of how well the
company's management controls costs. The two most used efficiency ratios include:
● Inventory turnover
● Average collection period

4. Profitability: Measures the profitability of a company in terms of its sales. Companies can indeed survive for years without being
profitable, operating on the goodwill of creditors and investors, but to survive in the long run, a company must eventually attain and
maintain profitability. It can also be used as a point of comparison between competitors. Some of the profitability ratios used are:
● Net profit margin
● Operating profit margin
● Return on Assets (ROA)
● Return on Equity (ROE)

5. Capital structure: The capital structure of the company is measured by looking at the debt to equity ratio and the leverage ratio
among others. It determines how much the company depends on borrowed funds or long term debts in running the business. It simply
shows the strategy that is put into use by the management of the company
● Debt to Equity Ratio

Pidilite had a strong balance sheet with low debt. Over a period of time, the company reduced debt on its balance sheet in a steady
manner; from 2011 – 2015 Long Term Debt has gone down to 0 and 5 million in secured and unsecured category.
Q3: Discuss all relevant assessment criteria relevant for assessing credit quality Discuss the framework for credit quality analysis for a target company

1. ePurpose: Assessment of the purpose of the loan. Pidilite was at a growth stage so the purpose could be working capital
requirement, capital expenditure, or retail financing

2. Amount: It will be assessed based on the capital structure and credit rating of Pidilite

3. Repayment: This determines the ability of Pidilite to repay the loan obligation and interest payments on a regular basis

4. Term: The term for which pidilite will use the loan

5. Security: The quality and amount of collateral given in consideration of the loan

6. Character: Credit quality of Pidilite determines this aspect

7. Ability: Pidilite’s potential to repay the amount of loan and interest payment obligations

8. Insurance: Meeting repayment obligations, pre decided covenants, and ensuring due diligence
Q4 and Q5 : Construct and interpret financial ratios you think are relevant
and construct a trend analysis to interpret the financial profile of the company
BALANCE SHEET
Q4 and Q5 : Construct and interpret financial ratios you think are relevant
and construct a trend analysis to interpret the financial profile of the company
Trend Analysis
Q4 and Q5 : Construct and interpret financial ratios you think are relevant
and construct a trend analysis to interpret the financial profile of the company
Ratio Analysis
Q4 and Q5 : Construct and interpret financial ratios you think are relevant
and construct a trend analysis to interpret the financial profile of the company
Income Statement
Q6: What are the industry parameters you will look at for assessing the business profile of the
firm?
1. Industry Life Cycle - Introduction, Growth, Maturity, Decline

2. Competitor Analysis - Pidilite Adhesives is an established player in player in the consumer and
specialities chemicals space in India. It had achieved a market leadership position on
account of a strong product portfolio and well-established network.

3. Industry Growth in the recent years

4. Profitability of Industry - Pidilite have shown a positive growth over the recorded period with rise in profits
- Competitive forces analysis: Evaluates potential threats from new market entrants, substitutes, and the
bargaining power of buyers and suppliers

1. Industry Risk & Challenges – Internal (SWOT) & External (PESTEL) factors
● Political Factors: Political scenario has lead to rising urbanisation and industry
growth and improving opportunities in small towns and rural areas
● Economic Factors: There have been an increase in Gross Domestic Product of the country leading to increase in
the growth of Pidilite
● Social Factors: Stable social scenario
● Technical Factors: Pidilite delivered an array of products due to its cutting-edge technology
● Legal Factors: There have been no negative legal obligation on Pidilite
● Ecological factors: Ecological scenario for the company
Q7: What the relevant economic factors playing a role in defining Pidilite credit quality

1. GDP – GDP lets a company foresee whether their industry will rise or decline. As GDP declines, businesses may choose to
start saving extra cash through layoffs and cost-cutting steps. If GDP is booming, a company may opt to grow. For example,
they might recruit more staff, pay higher wages, open new offices and sell more goods.

2. Supply and Demand - Supply refers to the volume of the product that is available for buying, while Demand refers to how
many buyers wish to buy the product. Together, supply and demand have a major influence on prices, impacting the credit
quality of the business.

3. Inflation – Increasing business costs may result in higher production costs and lower profitability, contributing to higher
prices. It is best to raise the prices steadily, rather than a rapid, greater increase, as customers could react negatively. Other
costs can also result from high prices, which have a significant effect on credit quality.

4. Exchange Rate – Businesses of any size expand their operations globally, and when they do, the exchange rate with each
country matters. Changing exchange rates affect how much a company has to pay to its international supplier to satisfy
them, which affects profit margins, as well as take a lot of resources to stay on top of.
Q8: What business risks will we need to factor in for Pidilite

Product Risk:
50% revenue is driven through their high in demand products such as Fevicol and M-seal and this over-
dependence is worrisome on a long-term basis i.e. incase these products become absolute in the future.

Financial Risk:
For a organization as old as Pidilite, it has strong financials as it has reduced its debt obligations steadily and
has become debt free for quite some time now. Over a 10-year period the organization has shown healthy
growth trend in sales, operating profit, net profit, and dividends.

Management Risk:
Management had a favourable outlook for the company’s differentiated offerings in the growing Indian
economy as well as in terms of exports to global countries so for Pidilite, Management risks were lower.
Q8: What business risks will we need to factor in for Pidilite

Reputation Risk:
The organization has brands that are resonated with the service they provide, for example, Fevicol has become
the adhesive name and not just a brand under the umbrella, people don’t ask for adhesive products at a
market rather they just ask for fevicol and hence there is a reputation risk attached to their major revenue
driven products.

Economic Risk:
No matter which industry we operate in, there is always a risk on market downturn and hence a factor of risk
that needs to be considered for this project.
Q9: What is the analysis of stock price movement of Pidilite vs its
peer group?
Noticeable competitors of Pidilite includes
organizations such as Tata Chemicals,
BASF, BOC India & thus to answer the
question in discussion, the peer group has
performed better than the benchmark
SENSEX to some extent, however the
returns showcased by Pidilite is
exceptional and a clear winner, topping at
29.51% return compared to the second in
the race being Linde India (BOC India) at
14.14%.

Bottom line: Basis the public information

available at our disposal and strictly
considering only the stock return as an
performance indicator, Pidilite has shown
On comparing the stock returns of Pidilite with the BSE benchmark index SENSEX over a period of off the chart returns with stable and
10 years, we will note that Pidilite has given a stock return of 7356.73% against SENSEX which was concrete establishments over the 10 year
standing at 555.76%.That is 6,800.97% above the rate of return of the industry SENSEX period, leading the industry in which it
operates.
Source: https://www.valueresearchonline.com/stocks/2933/pidilite-industries-ltd#snapshot
Q10: Summarise the analysis as done from 1 to 9 and comment on
Pidilite credit quality
Pidilite is a consumer centric company committed to quality and innovation. For decades, the organisation have been
pioneering products for small to large applications, at home and industry.

From adhesives, sealants, waterproofing solutions and construction chemicals to arts & crafts, industrial resins, polymers and
more, the product portfolio is as diverse as it is ever-evolving. Pidilite is a market leader in most categories.

A robust and growing network of products accessible across demographics and geographies is what defines Pidilite.

The case requires to assess the credit quality of the company based on varied factors and aspects. Clarity of the Pidilite
Industries Assessing Credit Quality problem statement is important to maintain satisfaction amongst the shareholders and
stakeholders. We’ve tried to develop a clear problem statement by stating the factors and the operations getting affected and
its overall impact on the organization specific the areas, such as Profitability, sales or brand equity.

Also, the purpose of the problem statement is to describe the external environment and its effect on the overall organization
in short and long-term. Moreover it also delineates the impact of such changing factors on the users, and other stakeholders.