Case Statement: A wealth management service has been in India for the last ten years. However, it has faced significant profitability issues in its operations since the beginning. It wants to make a decision on whether to continue to invest in India. What are your thoughts on this?
Candidate: Took two minutes to come up with a structure on paper
Candidate: Although I have an idea about the wealth management services industry, could you tell me more about the industry so I can proceed ahead with a clearer idea?
Interview: Sure. Our company competes in the wealth management services space which essentially means that we cater to people who have wealth that needs external management. We provide all kinds of services that help them deposit, invest and grow their wealth.
Candidate: Okay, so in that case I am right in assuming that we cater to high net worth individuals? Interviewer: As of now, we only cater to high net worth individuals.
Candidate: Is our firm an Indian firm or does it have external presence?
Interviewer: We are a firm with global presence and have retail banking services in Europe and America. In India, we have not explored the possibility of retail banking.
Candidate: Before I analyse our prospects for growth and reinvestment, I would first like to gain more information about the market and our competitors. What is the size of the market and expected growth rate? What is our market share?
Interviewer: The market as you can imagine is a fairly small market for us due to our stringent conditions on HNI customers. It has been expected to grow at 10% CAGR but this has not reflected in the growth of our business. We cannot be certain about our market share since the HNI market is not clearly defined. The definition of HNI differs from organisation to organisation.
Candidate: Okay. How many players exist in the market and what kind of competition are we facing? Interviewer: While we are one of three foreign wealth management services in the country, domestic retail banks are coming up with new products similar to wealth management services. Candidate: Great, now that I have a background about the environment, I think I should analyse the issue of profitability for our organisation.
Interviewer: Fair enough.
Candidate: For analysing profitability, we would have to look at revenues and costs incurred by the firm. The main costs that could be incurred are rentals on premises, technology costs, equipment and employee wages. For revenues we should first segment our customers by product category and analyse how we charge them for the services that we offer.
Candidate: I think we use the deposits with us to make profitable investments and earn our fees through interests on the investments.
Interviewer: That’s good. Why do you think profitability has been fluctuating in this model?
Candidate: There could be several reasons for this – 1. The number of customers we have is low, 2. Our investment strategy could be flawed 3. The economic scenario might not be permitting significant profit making.
Interviewer: Let’s assume that we have a very small customer base. What do you think we should do if we decide to invest?
Candidate: There are three reasons why we could have a small customer base – 1. Low awareness among the HNI category, 2. Negative Brand Image 3. Very few customers qualify our HNI norms. A few measures that could be implemented are 1. Increasing brand awareness and strengthening our reputation leveraging our strong presence in foreign countries, 2. Conducting research on the Indian consumers to understand the income segmentation and develop customised products for the top 3 high income segments.
CASE: WIND ENERGY INVESTMENT (BCG)
Interviewer: Investor consults you. He wants to invest in the wind energy market in India. How do you evaluate this idea? Tell me how you will proceed.
Candidate: We should look at the Energy market in India – current & future growth prospects. Who else will you sell it to? Can you sell it outside India?
Interviewer: No, you can’t
Candidate: We should further look at the competition – other wind energy companies and other energy companies (non-wind). In addition, we should also find out about Government regulations with windmills and incentives to green energy sources.
Interviewer: Good, but exactly how will you evaluate?
Candidate: We should calculate IRR, from potential revenues and costs. The costs involved are… Interviewer: Wait. Let us begin with the revenues.
Candidate: Okay. How does one sell power in India? When you link to the grid and supply power, how do you get paid?
Interviewer: You sign a Power Purchase Agreement (PPA) with the government before you connect to the grid. It is like this: You supply X units at Y price. Let us assume you will produce and supply 100 MW at Rs.6/KWH
Candidate: <Candidate starts drawing a sample windpower generation graph on the paper> Interviewer: <smiling> Please assume 95% efficiency and give me the numbers quickly. No, assume 100% efficiency.
Candidate: <after calculations> That would be Rs.129 crores per year. Interviewer: Okay, let us proceed to the costs part.
Candidate: There would be fixed costs and variable costs. Fixed Costs are the cost of purchasing the turbine, blades, equipment for grid transfer and purchase of land. Is the land purchased or rented? Interviewer: It is purchased. You are forgetting two more fixed costs – the cost of transporting equipment to the site and cost of commissioning the equipment.
Candidate: Okay. The variable costs would be salary for staff, maintenance cost and the downtime cost.
Interviewer: Assume the variable costs put together are 10% of revenues. Calculate the breakeven period.
Candidate: That would leave us with a contribution of Rs.117 crores. How do I estimate the fixed costs?
Interviewer: A general thumb rule you can use for the fixed costs is Rs.6 crore / MW capacity installed.
Candidate: That gives us 5-6 years breakeven period. Interviewer: How do you plan to finance this?
Candidate: The investor will invest some money. Rest of it, the wind power company will borrow. Can we assume a Debt-to-Equity ratio of 1:1 ?
Interviewer: Government allows a Debt-to-Equity ratio of 4:1 in the wind energy space. You can also depreciate your asset until 20 years. We’d like to make use of this opportunity. Assume debt at 10% interest rate.
Candidate: So, that gives us depreciation cost of 30 crore; and interest expense of 50 crore per year. That leaves us Rs.37 crore cash flow at the end of the each year. We should calculate Net Present Value of 37 crore cash flow for 20 years @ 10% interest rate.
Interviewer: Very good. What is the biggest risk you foresee?
Candidate: Conventional sources like thermal power from coal would be cheaper.
Interviewer: Your line of thinking is right. Rs.6/KWH paid by the government is a subsidized rate. If the government decides to pay lesser, then your entire calculation will go wrong.
Candidate: Yes, that is correct.