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Group5 - Assignment 2

The document discusses potential business models for Scak Textiles to pursue in order to meet its profit target of Rs. 500 million by 2025. It analyzes the pros and cons of Scak's current wholesale model along with retail, manufacturing, e-commerce, and export options. It recommends a combination of e-commerce and manufacturing to increase audiences and margins while reducing costs. It also suggests funding the manufacturing expansion initially through loans given Scak's existing high debt-to-equity ratio, and provides required calculations for Scak's valuation in the new business model combination in an attached workbook.

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Nitesh
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99 views

Group5 - Assignment 2

The document discusses potential business models for Scak Textiles to pursue in order to meet its profit target of Rs. 500 million by 2025. It analyzes the pros and cons of Scak's current wholesale model along with retail, manufacturing, e-commerce, and export options. It recommends a combination of e-commerce and manufacturing to increase audiences and margins while reducing costs. It also suggests funding the manufacturing expansion initially through loans given Scak's existing high debt-to-equity ratio, and provides required calculations for Scak's valuation in the new business model combination in an attached workbook.

Uploaded by

Nitesh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Assignment 2

Ans.1
Scak Textiles LLP or Scak had a cloth business in Garment Industry in Hisar, Haryana state.
Scak is a family running business which is established in 1988. Scak business model is
Wholesale selling and retail selling. Its mainly revenue is generated from whole selling. Scak
served as a facilitator between the garments manufacturers and Retailers. In this segment
scak earn around 5% to 7% gross margin. After this Scak’s own wholesale segments enabled
it to bypass intermediaries in the supply chain and sell merchandise directly to end
customers. Retail sector have high gross margin around 10% to 14%.
Sack Textiles’s owner Ajay wanted to achieve the target of Rs. 500 million profit with
sustainable margins by 2025. But by looking at the current revenue, profit trends and other
financial indicators , there was downward movement in revenue and profit. Although there
was a negative impact of demonetization, GST but continuing with

Ans.2
Company’s operating performance is improving over the last year. From cash flow statement
we analyzed that company is earning cash from operations in this year while in the previous
year there was negative cash from operation. Its operating cycle is 75.4 days while previous
year 116.8 days which is higher. Its net operating margin was 4.43% which fall down from
4.94% in last year which saws that company increase its operating expenses. Also company’s
Inventory turnover ratio is 12.9 times this year which is higher and showing that company is
purchasing more and not able to sale its goods. But its working capital turnover ratio is high
which is 15.8 in this year which saws that company is utilizing its assets properly and
indicates that a company is able to generate a larger amount of sales in 2020-21.
Firm’s long term debt to equity ratio was too high in last years which is not good for company but in
2020-21 It was 1.2 which is showing company is paying its debt and maintain its leverage and
solvency.
Company’s financial position is also good that cash from financial activities is positive from last two
years which says that company is paying its debts by time to time and raising new debts. Also its
return on equity is high in last year but due to increase in retained earning it decrease in ROE. And
return on total assets increase over the period.

Ans. 3

Model Pros. Cons.


Wholesale Market leader in wholesale cloth Gross margin is only 6.5% - 8.5%.
business. Space shortage,
Revenue mainly generated from No direct interaction with customer
wholesale around 85% to 87%. Requires huge capital
Scak can afford large working capital
which can only few afford,
Less marketing and advertisement,
Retail Gross profit margin is 10% - 14% and R R SD&A is higher respect to
PAT is also high. wholesale.
Increased opportunities to create or build Possible damage to wholesale
upon brand personality, relationships as you will become a
Direct interaction to customers, competitor,
Increased customer returns, and
adherence to consumer purchasing
and returns legislation

Manufacturing Higher gross margin respect to other Requirement of huge fund for
model and reduce selling price or can equipment’s,
give discount to its customers. Higher operating expenses,
Reduce purchasing or acquiring cost of
material from manufacturers,

e-Commerce Increase sources to customers to buy its Network or technical issues in


products, villages,
Easy in advertising, Customer can’t try before they buy
Low financial cost and potential income, Lengthy delivery time,
Easy to retarget and remark customers Highly competitive,
Export EBITDA is 25% of sales which is More restriction, like if there is any
higher than other model. situation such as lockdown in whole
Countries economy will increase, country, this business will cause a
huge loss.

One or more Manufacturing and wholesale model is Higher cost for manufacturing and
combination good because higher margin and less funding issues,
competition,

Ans.4
Pre money value of the business:
Existing equity shareholder’s = 15.5
Debt in 2020-21 = 43.2
Pre money = 58.7
All calculations are provided in the attached workbook on sheet ‘Pre money evaluation’

Student Spreadsheet-
SCAK case-FINAL.xlsx

Ans5.
a) For reaching the dream milestone, it is recommended to go for a combo of ecommerce and
manufacturing business. Venturing into ecommerce segment allows them to increase the
audience of their products to bigger cities without being physically there, saving on physical
expansion costs. Their ethnic designs and simplistic product will surely lure the customers in big
cities, where such products are scarce. That cost saved can be put in manufacturing, since it is a
capital-intensive option, both in terms of money and time, but, with time, they can eliminate out
any wholesalers and retailers, which allows them to increase their margins, and pass some of it to
the consumers in form of lower prices, and since there is no product differentiation, product
prices is the dealbreaker in the market.
b) For initial funding of manufacturing operations, Scak can go for a loan. The rest of the
funding can be obtained via equity financing. Funding from Equity is more suitable for the
company because company have already high debt to equity ratio which is not good. Which saws
company is highly leveraged and in the future investors will not invest in this company and the
company will have difficulties in paying its debts in future if there is high loss in manufacturing
process or will not able to generate required net income to pay it debts.
c) The required calculations for SCAK’s business and equity shares are provided in the attached
workbook on ‘Value w E-comm and manufacturing’ sheet.

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