Kindly answer the below 2 questions based on Indian School of Business case study by Tuhin Harit | Vikram Kuriyan | Geetika Shah

You will now help Smith perform the valuation of Patanjali. Use the following assumptions for your calculations from the years 2018 to 2022. Remember, you are performing the valuation at the end of 2017.

Smith has given you the following assumptions based to work with.

Assumptions:

1. Revenue Growth = 50%
2. EBITDA Margin = 20%
3. D&A (as % of Capex) = 40%
4. Capex (as % of Revenue) = 2%
5. Discount rate = 12%
6. Tax rate = 30%

Use the 2017 revenue value given in Exhibit 2: 10,000 cr.

Additional simplifying assumptions:

1. The company has negligible debt. Debt can be considered as 0.
2. Working capital remains constant throughout. So there is no change in net working capital.
3. The free cash flows from 2023 onwards are constant and equal to the 2022 value. They continue forever.

Question 3A: Which of the assumptions could have negatively impacted the enterprise value that you calculated using the DCF method? Identify at least 2 such assumptions. (5 marks)

Question 3B: Smith is doing the valuation in 2017 and makes several assumptions about the future. As you know now, the Covid-19 pandemic took the world by storm from 2020 onwards. If Smith could have somehow predicted the pandemic in 2017, how would it have influenced his valuation of Patanjali? Justify your answer. (5 marks)

PATANJALI AYURVED Year Revenue EBITDA D&A EBIT EBIT(1tax) Capex c FCF to company (a+bc) Terminal value (2023 onwards) FCF + Terminal value Enterprise Value d In Crs B C D F G H I 5 2017 1 2018E 2 3 4 2019E 2020E 2021E 2022E \begin{tabular}{|l|r|} \multicolumn{1}{c|}{ I } \\ \begin{tabular}{|l|r|} \hline Assumptions \\ \hline Discount Rate & 12% \\ \hline Tax rate & 30% \\ \hline Revenue Growth & 50% \\ \hline EBITDA Margin & 20% \\ \hline D\&A (\% of Capex) & 40% \\ \hline Capex (\% of Revenue) & 2% \\ \hline \end{tabular} \end{tabular} \begin{tabular}{|c|c|} \hline 1 & J \\ \hline \multicolumn{2}{|l|}{ Assumptions } \\ \hline Discount Rate & 12% \\ \hline Tax rate & 30% \\ \hline Revenue Growth & 50% \\ \hline EBITDA Margin & 20% \\ \hline D\&A (\% of Capex) & 40% \\ \hline Capex (\% of Revenue) & 2% \\ \hline \end{tabular}