FINGAME-MID TERM REPORT

Team PSCube

AUGUST 26, 2013

SHAMPY DE DADDY!!! Kanumala Praveena MS12A039 Sameer Arora MS12A073 Shine Nagpal MS12A083 Smruthi Reddy MS12A087

Long Term Perspective:

The strategy of the management has been largely focussed on maximizing the shareholder wealth in the long term. In this regards lots of decisions had been taken which had have mixed effects in the resultant prosperity factors.

As of quarter 5
Market share price:
Fighting down the market fluctuations the company has been able to maintain an increase of about 157% till the end of quarter 5.

Sales Revenue:
Increase in revenue (sales) was $12002999 at the end of quarter 5 has been 85% approximately from quarter 1.

Net Income:
Net income which was $1873602 at the end of 5th quarter which is 85% increase since quarter 1.

Capital structure
Issuance of shares:
Management issued shares in quarter 2 and quarter 4. We have not been much efficient in paying out the dividends as we have done some incorrect interpretations. R=P/(1.05+.5Sn/So) - $50000/Sn P = Current common stock price S n = Number of shares offered S o = Number of shares currently outstanding Based on this we raised equity by offering share price for $39 which opened at $68. It gave us an opportunity loss of about 3 million dollars. The second instance we were able to garner equity at a better price which was more than the receipt price. Total equity as of Quarter 6 No of Shares: 196000 Equity: 26,477,65

Debt and Loans & Equity:

We have opted for a mix of Debt and equity in quarter 2 and 4 respectively and raised debt alone in quarter 6 trying to take leverage of increased tax rate from 10% to 20%. All these decisions have been taken to purchase new plant and machinery as we have always maintained just adequate inventory and thus instead of taking huge loan at once we took small loans at intervals. Loans have been apportioned among 3 year and 10 year loans so as to reduce dependency on one source of loan in case of interest fluctuations. Our D/E ratio is as follows: Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 D/E 0.18 2.4 0.3 0.3 0.3 0.63 0.58 0.60 0.60 Q10 0.60

Repayment of loans:
We will be using our cash reserves for repayment of three year loans as their rate of interest in going high as well as there is no penalty for calling the three year loans. This way we will be saving of about $70000 per quarter which will help us compensate the reduction in Net Income due to increased labour costs.

Cash Management
Our cash balances in six quarters till now has hovered around about 10% of our total assets. We kept our cash balances a bit higher than required due to following reasons: 1. We did not want to face liquidity issues early in the game 2. We were a little conservative in our approach so that we can face any unforeseen event with excess cash balance. 3. Also we did not want to forego the opportunity to invest in any project which may come our way in future and that could have been ensured by hefty cash balance.

Production, Plant & Machinery Strategy:

Basing on the forecasted demand for the future quarters, we ordered plant keeping in mind demand 23 quarters since it involves fixed cost of 250,000 ahead and machinery one quarter ahead since machinery ordering doesnt involve fixed cost. We considered that the actual demand would be ranging from second best estimated forecast to most accurate estimate.

Error of omission:
The forecast for Q2 and Q3 was well below 100,000 units. With a strategy of maintaining low inventories, we reduced our production in Q2 to 95000 and Q3 to 90,000 units. Since the demand was forecasted to increase in Q4, as per both Q1 & Q2 reports, we took a decision of ordering extra plant capacity in Q2. But as the forecast indicated a decrease in the forecasted demand of Q4 from Q1 to Q2, we didnt order extra machinery in Q3. But the forecast of Q3 indicated an increase in the Q4 demand. Thus our team ended up in inventory shortage. This affected us for two quarters.

Inventory Level
Although our initial strategy was to avoid stock out costs, however, demand fluctuations prevented us to invest more in plant and machinery and thus, keeping lower inventory as a result of which we did face stock out in quarter 4.

Capital Budgeting Strategy

For capital budgeting, the decisions were made according to the IRR of the project. Project with high IRR is accepted and the one with low IRR is rejected. So far the Capital budget decision has been made in favour of Project B until quarter 5. IRR was considered only if the NPV for the project was positive.

Contingency Decisions:
In 6th quarter there was a probability of a strike. We had three options to execute: 1. Either go on with the risk of strike 2. Increase the labour cost by $6(Settlement) and reduce the probability of strike by 50%

3. Increase the labour cost by $15(settlement) and avoid the strike altogether. We went with the third option because of following reasons: 1. We had Zero inventory levels to begin with and also we expanded our capacity by taking debt in quarter 6 which made it essential for us to not let strike affect our production schedules. 2. Although we agree that we were hasty in our decision of giving $15 settlement cost, but we had to make a choice between Micromanaging and Long term strategy. At that point it made more sense to us to avoid strike.

Short Term Liquidity:

As shortage cost is expensive we kept cash levels on a higher side as a contingency plan.

Mistakes/ Learnings:

Error of Omission: We never maintained an error margin for the forecasted demand. But
since our plant and machine ordering is dependent on the forecast, which is accurate only for immediate quarter, we should consider an error margin while ordering for plant and machinery. Learning: Shouldnt play with very low inventory margins. We implemented that learning in the further quarters Error of Commission: We issued the shares into market at a price of 39$ which lead to an opportunity loss of about 3Mn$ by miscalculating the market price of share using the formula. Once again in Q4 we issued shares. But in this quarter, we issued the share at 70$ but the market sentiment of our share was low hence the share selloff price was only 62$, though our share price went up to 76$, which caused a loss of 1.4Mn$. We learnt that market sentiment play a role along with the logic Learning: We wanted to be a market leader hence didnt want to compromise on the production by taking risk of strike. Hence we went for 15$ settlement. Taking a calculated risk of going for a 6$ settlement would have been a better option. We took minimum risk and thus our gain also tends to be limited for coming quarters.

Future Plans:
Pricing Strategy
Since we plan to concentrate on the market share, we may revise the price frequently. We however plan to keep our price high because our per unit cost of production is relatively high, so we would try to maximize our revenues by increasing price and producing less at same time.

Capital Structure:
As our Debt to Equity ratio is healthy enough to take advantage of tax shield and growing market, we intend to keep it at similar levels. In case we need to go for more debts we will be interested in 2 year and 3 year loan.

Interest Rates
4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Short-term 2-year loan 3-year loan Bonds Preferred

Liquidity Management
As the carrying cost is rising we cannot afford to keep our cash balances as in previous quarters. We intend to keep the cash balance to an ideal amount of $150000 as suggested because only with this average amount only the shortage cost and carrying cost would balance out in long term.

Production Management
Our inventory management strategy was to maintain just adequate levels of inventory. Considering the increase in our labour costs we cannot bear stock out cost at all. Thus we plan to keep safe inventory levels.

Dividend Strategy
We would be conservative in paying dividends however we would like to pay stable dividend rather than doling out large but uneven dividends. Ultimately we would try to have a stable dividend policy.

Investment/Buyback Strategy:
Since our EPS is getting a hit because of high COGS, we will have to reduce the number of outstanding shares in order to maintain better EPS. Thus we plan to buy back some shares. This also helps us better implement the liquidity policy as decided for future.

EPS Guidance Quarter 6 7 8 Quarterly EPS Goal -0.39 -0.20 0.30 Comments Existing Paying back debt( three year loan) Controlling price, Capitalizing on High demand, probable buyback of shares Reduced demand forecast and purchasing of plant and machinery Reaching a stabilized EPS

9 10

0.20 0.25

Conclusion
PSCube has had a tough 6th quarter wherein negotiation costs were very high as risk appetite was low and thus the increase in labour costs by $15 took us way off the track. This is going to hurt us in the future quarters. Thus, the strategy should be as follows: 1. Play on Margins We have a high cost and thus will have to price our product little higher that the market in order to realize positive gains. 2. Liquidity Management We will have to ensure that we improve on the liquidity management of the firm and use the excess of cash either to invest if it is needed later or to repay debt. Perhaps we may have to look to pay consistent dividends payments in order to boost our share price and companies image. 3. Market sentiments to be measured more carefully In the past, the company has not been agile in the way it should have been. Thus, we will keep our production abilities higher and thus will have a choice whether to produce or not depending on the forecasts. This capability was not realized earlier and thus, we did loose on fronts of high bullish periods by not being able to produce aptly.