Case 014Earnings and resultsCore
Fenvara Capital Goods has an order book of Rs 12,000 crore, order inflow of Rs 2,100 crore this year against Rs 3,000 crore last year, and revenue of Rs 2,600 crore. What does a book to bill of 0.8 imply for revenue two years out?
1The situation
Fenvara Capital Goods builds heavy equipment for power, rail and defence customers on long contracts. This year it booked Rs 2,100 crore of new orders, against Rs 3,000 crore last year, and recognised Rs 2,600 crore of revenue. The order book at year end is Rs 12,000 crore.
Management says the book gives visibility for years. Street models have revenue growing 10% a year. Assume Fenvara keeps executing the same share of its opening book each year that it did this year.
2Your task
What is the book to bill telling you, and what revenue should you expect in two years if inflow stays weak, or if it recovers?
Quick check
If order inflow stays at Rs 2,100 crore, what happens to revenue over the next two years?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
A book to bill of 0.81 means the book is draining, and revenue two years out is about Rs 2,414 crore, roughly 7% below today, against the street's Rs 3,146 crore. Fenvara executes about 20.8% of its opening book a year. With Rs 2,100 crore of inflow against Rs 2,600 crore of revenue, the book shrinks and revenue follows with a lag. Even if inflow recovers to Rs 3,000 crore next year, year 2 revenue is only about Rs 2,601 crore.
Step 1How does an order book behave?
Think of a water tank with a tap filling it and an outlet draining it. The order book is the water level, new orders are the tap and revenue is the outlet; when the tap runs slower than the outlet, the level falls, and a lower level means a slower outflow next year. Book to billNew orders received in a period divided by revenue recognised in the same period. Above one the order book grows; below one it shrinks. is the tap divided by the outlet: 2,100 over 2,600 is 0.81.
First find how fast Fenvara executes. The book at the start of the year was 12,000 plus 2,600 of revenue minus 2,100 of new orders, Rs 12,500 crore. Revenue of 2,600 is 20.8% of that. The book is 4.6 years of revenue, so the drain is slow, which is why a falling book can hide behind a large one.
| Rs crore | Today | Year 1 | Year 2 |
|---|---|---|---|
| Revenue, inflow stays at 2,100 | 2,600 | 2,496 | 2,414 |
| Order book at year end | 12,000 | 11,604 | 11,290 |
| Revenue, inflow recovers to 3,000 | 2,600 | 2,496 | 2,601 |
| Street, +10% a year | 2,600 | 2,860 | 3,146 |
Step 2Why does a recovery in orders not fix year 2?
Because next year's revenue is already set by this year's closing book: Rs 12,000 crore at 20.8% is about Rs 2,496 crore whatever orders arrive. A recovery to Rs 3,000 crore of inflow only lifts the book for year 2, and then only enough to bring revenue back to about Rs 2,601 crore. That lag is what makes order inflow the leading indicator and revenue the lagging one. The street's 10% growth needs either much faster execution or inflow well above Rs 3,000 crore.
Say the limitation. The execution rate is not fixed: a book full of slow defence contracts executes more slowly than one full of short rail orders, and a customer's delay can freeze part of the book. Ask for the book by segment and expected execution year, and check whether any large orders are stalled, before trusting a single rate.
Where candidates lose it
The common answer is that Rs 12,000 crore is more than four years of revenue, so there is nothing to worry about. The size of the book tells you how slowly the problem arrives, not whether it arrives.
The second miss is expecting revenue to fall to the new inflow level at once. Revenue follows the book, not the orders, so the decline is gradual, and a candidate who forecasts Rs 2,100 crore next year has confused the tap with the level.
What the interviewer asks next
- What inflow does Fenvara need each year to hold revenue at Rs 2,600 crore?
- How would a faster execution rate change next year's revenue and the year after's?
- Why might management accept lower-margin orders when inflow is weak, and how would you spot it?
Company names and figures are illustrative.