Online Financial Modelling &
Valuation Course
Ronak Gala
Week 2
Model making process
Understand Decide Input
Business Template Historical Data
Valuation Forecasting Decide Drivers
Step 3 & 4
Deciding Drivers &
Forecasting Financial Statements
Forecasting Sales
• Identify Drivers of Sales (Volume x Pricing)
• Incase of JustDial Volume is No. of Paid Campaigns and Pricing is Realization
per Campaign
• Incase of Shree Volume is MT and Pricing is Realization per MT
• Make assumptions on volume and pricing drivers (grow them by a
particular %)
• Work backwards to determine Sales number
Forecasting Costs - I
• Identify Drivers of Major Cost (again volume and price)
• Incase of Justdial no. of employees and cost per employee
• Incase of Shree it is COGS per MT
• Forecast Cost Drivers assuming absolute / % growth
• Work backwards to determine cost numbers
• Double check key metrics at this point
• Paid Campaigns / Total Listings & Employee Productivity for JD
• Capacity Utilization for Shree and Gross Margin
Forecasting Costs - II
• Make an assumption on other costs as a % of sales
• Be conservative.
• Forecast other costs by backward calculation
• Calculate EBITDA and EBITDA Margin
• Check EBITDA margin for rationality
• You can forecast individual operating cost line items as a % of Net
Operating Revenue
• Pending Line Items – Depreciation, Finance Cost, Other Income and Tax
Forecasting Fixed Assets and Depreciation
• Forecast Capex from guidance and expansion plans
• Forecast Gross FA = Previous Gross FA + Capex – (Curr. Cap WIP – Prev. Cap
WIP)
• Assume Depreciation Rate and forecast
• Calculate depreciation based on the assumed depreciation rate and
forecasted Gross FA
• Calculate Forecasted Net FA. Assume Capital WIP in future to be 0
Forecasting Working Capital
• Forecast Days Sales of individual working capital items – except cash
• Reverse calculate individual WC line items in Balance Sheet
• Provide change in WC effect in CF statement
Other Assets and Liabilities
• Individual line items you can keep constant – except investments
• Combined line items like other assets / other liabilities, you can keep
constant to grow with same % as sales growth – depends on past trends
• Forecast LT Debt as per guidance and capex plans
• Items remaining to forecast – Shareholders' capital, cash and investment
• Check and Give Opposing effects of all Balance Sheet Changes in either P&L
or Cash Flow
Forecasting Debt and Finance Cost
• Calculate Interest Rate (%) : Finance Cost / Avg. Debt
• Forecast Debt – as a function of Capex (LT Debt) and Sales (ST Debt)
• Assume Interest Rate for future
• Forecast Finance Cost : Assumed Interest Rate * Avg. Debt
Forecasting Investments and Other Income
• Assume No Change in Investments and Forecast – This will be adjusted
later
• Calculate Interest Earned % : Other Income / Avg Investment Value
• Forecast Interest Earned % using an assumed value
• Give Cash Flow Effects to Other Income and Change in Investments
• Keep Investment in Subsidiaries Constant
Complete Your P&L
• Calculate PBT
• Keep Exceptional Items as 0 for all forecasted years
• Calculate Tax as per the current ETR – 25%
• Calculate PAT and other line items
• Give effect of Tax Paid in Cash Flow
Complete your Balance Sheet
• Keep Equity Share Capital Constant – This can be adjusted later if required
• Add PAT to Reserves and Surplus (PAT – Dividend if that is expected)
• Give Dividend effect in Cash Flow
• Give Change in Equity Share Capital Effect in Cash Flow
• This should complete your entire balance sheet except Cash & Bank
Complete your Cash Flow
• Link all the figures with forecasted line items from P&L or Balance Sheet
• Cash Flow is a completely derived statement (except Capex)
• i.e. – All items except Capex should be linked to something in P&L and Balance Sheet
• Forecast all Others as 0
• Keep in mind sign in the Cash Flow value
• Get cash value at the end of year and link it to Cash & Bank in Balance
Sheet
Adjustment and Debugging
• Now you Balance Sheet must Tally – Check value should be 0
• Copy Paste all ratio calculations
• Adjustments based on Excess Cash being generated
• Investment value – simply change investment values in Balance Sheet manually
• Dividend – Add additional line item on Dividend and give effects in Cash Flow and R&S
• Buybacks – Add 2 additional line items. Share Capital Bought Back and Premium Paid. Total
buyback effect will be in Cash Flow, Share Capital and R&S (Premium Paid)
• Debugging
• If your Check balance is not 0, you need to debug your model
Debugging the model
• Check the quantum of difference in check balance
• Search for values that are equal, double or half of it – if there is only 1
error, then you can identify it quickly
• If there are multiple errors, start from P&L and check line by line if
opposite entries in the Cash Flows are given correctly.
• 80% of the times, errors reside in cash flow
Rationalize your assumptions
Some Ground Rules For Assumptions
• Rely on past trends
• Be conservative
• Look for guidance numbers
• Look for major changes / disruptions / developments
Assignments are very Important!
Do not expect to learn a real skill without practice and efforts.
Assignment
• Complete the JustDial Projections Yourself
• Give a thought to your assumptions
• Read up on the business and concall transcripts to hone your assumption
numbers
• Your assumptions will be discussed in the next live interaction session.
• Complete the Shree Cement Projections Yourself
• Give a thought to your assumptions
• Read up on the business and concall transcripts to hone your assumption
numbers
• Your assumptions will be discussed in the next live interaction session.
