Developing pricing strategy to gather market share across the geography

Assignment Taken

Financial Planning for the PMCASPL company

Case Understanding

Case Understanding: Mr. Manoj Singh and Mr. Parth Mittal started PM Clean Air Solutions Private Limited (PMCASPL) company in Bangalore. Manoj who was closely associated with the R&D of his Air Quality company, had developed a concept of a hybrid product, which can monitor, manage and suggest the combinations to improve the air quality. While Parth has been working in the shipping company in Kolkata. After the prior investment and rigorous efforts, they came up with the final prototype of the product. After which they obtained an investment of 100 million INR from venture capitalist (SAIF Capital) and another 100 million from a show with an equal share of equity and Debt. Being a client for the PMCASPL, we are subjected to advise them on their greenfield venture with an innovative product in an underexplored segment. We need to find a proper geographical location for the production with proper distribution network. Additionally, with a budget of 100 million, we need to allocate sufficient funds as working capital along with proper marketing and Human resource management strategy. And the most Important decision as a consultant, we need to clarify whether the progression of large-scale production is feasible for the company or not? PROBLEMS RELATED TO FINANCE DEPARTMENT: There are four major concerns that as part of finance department we need to handle. Fund for the expansion, working capital requirement, Fund Allocation to the various department and Pricing of the product to resolve the demand supply shortages. There is also a Liability of 6 million per year from the debt that we owed during fund raising. Present funding Situation: The present equity holding of the two directors Mr. Manoj Singh and Mr. Parth Mittal are 45.24% each, with 4.76% equity with SAIF capital for 10 crores and 4.76% with the show judges where they raised 10cr as a mix of equity and debt in equal proportion. The debt component has a 60 Lakh annual interest to be repaid.

BCS Solution Summary

BCS solution summary: We approached the financial circumstances in three strategy stages of discussion and problem-solving approach. With the greenfield project ahead, we projected to target the 3.7% of the present market share which is increasing at a rate of 31% CAGR. Also, with the detailed cost Sheet we analysed that the breakeven price for this year is 16799 but this price is higher than the market estimate. Hence, we have suggested to sell per unit at 15,999/- which will bring the break even at 41470 units. Also, we have separated a Working capital budget to ensure downside risk of production due to capital risk. Also, we suggest that the equity with the directors can be pledge to gather sum for urgent working capital needs (if required)

Solution

Market Size:  The report from TechSci Research depicts the market size for the Indian Air Purifier market size to be $85.08 Million for the FY2021. The value with linear regression for FY22 comes to be $111.52 million (as the CAGR is said to be 31%). As we are a greenfield entrant in the market, we cannot expect to be a market leader from the initial phase. So, we aimed to capture 25% of the market leader size which comes out to be 3.7% of the overall market in a tenure of a Year. So, the targeted revenue for the company comes out to be ₹335 million.

Plant Location: We would suggest the manufacturing plant to be started in the Faridabad district. This decision is based on 3 major reasons. Initially as per the Environmental Protection Agency (EPA)’s rating of Air Quality index, the northern belt of the populous district is majorly impacted with bad air quality. Secondly groups director Mr. Manoj Singh has prior experience in this field. Finally, the Faridabad Noida belt is known for skilled unorganised sector workers who can be employed for relatively lower pricing of the other competitive market. We Allocate a cost of 30 lakhs for the accusation of 2000 mt2 of the plant. Additionally, we will use the near a BPO centre for the customer service. The Production budget will have a fund of 2.0 Crores for the construction of the plant.

Marketing Budget: The new greenfield project needs to be implemented with a detailed marketing plan and henceforth the similar weightage for the budget as this will be a steeping stone for the project. The three phases of marketing have different obstacles and so a different solution need to be proposed. The budget allocation of this department includes Print department (usually only during initial Phase), Digital Marketing (a recurring expense with decreasing coefficient) and customer service. We allocate 10% of the revenue to marketing expenses.

Human Resource Budget: For Human resource the curve of the expenses will trend towards a declining line for the Training Program. The training being digitally held will reduce the budget to 10 Lakhs per annum. The various Configurations of the salary of other members for the year is as follow:

Designations	Monthly Wages	No. of Employee	Annual Expense
Manufacturing Employees	15000	20	300000
Supervisors	20000	2	40000
Field Executives	30000**	10	200000
Software Developer	150000	3	300000
Mobile App Developer	80000	2	160000
Web Designer	35000	2	70000
Directors	50000*	2	100000
Total			18240000

*Directors will be given ESOPs and performance-based incentives for 50000 per month at end of annual year

**a variable component will be attached worth ₹10000 based on the sales target

So total Expense for the HR department is ₹ 1,92,40,000.

IT Budget: The department needs entire purchase for the hardware and software. The totals cost expenses as per our calculation comes out to be ₹1,28,00,000.  Also, we have taken a depreciation rate at 12% for the IT assets which is equivalent to the industry standards.

Working Capital Allocation: With the assumption that 30% of the Manufacturing cost is through the raw materials, we need to ensure a capital that sufficient capital is they are for the raw material ordering. As we are new to the market, we assume that the credit period for us is 15 days where as the payable periods is high as 20 days. Also, we consider Inventory turnover as 10 day and no WIP for the end of the day. Additionally, we are at a liability of 60,00,000 which need to be paid as interest for the year. As our sales target is ₹271 million, with a approximate manufacturing capacity of 80 per day and 300 manufacturing days we can produce 24000 pieces i.e., 67 pieces per day. So, the working capital to be ensured is

Table: Calculation of the working Capital

Particular	Days to Hold	Value Per Day	Total Value
Raw material	5	30% of FG	1497450
WIP	0		0
Finished Goods	10	100% of FG	8984700
Total			10482150

Total Working Capital required at any instance is ₹ 1,04,82,150

Consulting Expense: The total Expense of the consulting will be ₹60,00,000

 

 

Lets now explore the Cost side of the solution.

*Assuming 30% of total cost as raw material

Table: Categorising the total cost as Raw Material and Manufacturing expense

Particulars	Air Sense	Air Loop	Per Product Cost
Cost for Prototype	15000	8000	23000
Cost of Bulk Production	10500	4400	14900
Raw material Cost	3150	1320	4470
Manufacturing Expense	7350	3080	10430

Table: Cost Sheet for the tenure of a year

Cost Sheet
Units Produced		24000
Cost Per Unit		₹15,999
Total Revenue		₹ 38,39,76,000
Raw material Consumed		₹ 10,72,80,000
Depreciation
	IT Assets @12%	₹ 32,07,600
	Plant and Machinery @10%	₹ 20,00,000
Employee Expense		₹ 1,92,40,000
Manufacturing Expense		₹ 25,03,20,000
Add: O/P WIP		₹ 0.00
Less: C/L WIP		₹ 0.00
Factory Cost of Sales		₹ 38,20,47,600
Add:
Other Over Heads
	Consulting Fees	₹ 60,00,000
	AQMS development cost	₹ 1,20,00,000
	Interest	₹ 60,00,000
Total COGS		₹ 40,60,47,600
Profit/Loss		-₹ 1,92,00,000

Final Comment: With a breakeven sale of 41470 units with a fixed selling cost of 15999/- per unit. Additionally, after 1 year warranty we will charge the maintenance fees of the product on a to recover components of expenses. Presently we are not making profits and suffering a huge loss of ₹ 1,92,00,000 this year, still we recommend to continue with this project as most of the fixed cost expense has been taken over during this year.

Conclusion

Conclusions: The final fixed cost per unit of the product we offer is ₹ 15,999/-. The Various cost allocated to Different departments are as follow: Table: Department Wise Budget Marketing Department ₹ 3,83,97,600 Human Resources Department ₹1,92,40,000 IT Department ₹1,28,00,000 Working Capital ₹1,04,82,150 Plant Setup ₹ 1,30,00,000 Consulting Fees ₹ 60,00,000 Total ₹ 9,99,19,750 This will ensure a smooth running of the process as we have countered for the working capital and still have some reserve left over. The Break-even point is at sales 41470 units. The Images of Various Calculations Has been shared

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