Case 064Earnings and resultsWarm up
Pellora Cooling sells 40% of its annual volume in April to June, and first-quarter revenue is up 30% on a heatwave. Why is multiplying the quarter by four wrong, and what is a sensible full-year number?
1The situation
Pellora Cooling makes room air conditioners. Last year its revenue was Rs 3,000 crore: Rs 1,200 crore in April to June, Rs 600 crore in July to September, Rs 540 crore in October to December and Rs 660 crore in January to March. The summer quarter is 40% of the year.
This year a severe heatwave lifted April to June revenue 30% to Rs 1,560 crore. A colleague's note says the business is now running at Rs 6,240 crore a year. Your view is that the other three quarters grow at the underlying 8%.
2Your task
Explain what is wrong with the colleague's number and give a sensible full-year estimate with the one risk to it.
Quick check
What full-year revenue does the quarter really point to?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 3,504 crore for the year, up about 17%, not Rs 6,240 crore. April to June is 40% of Pellora's year, so multiplying it by four more than doubles the true run-rate. Even scaling by the 40% share, Rs 3,900 crore, assumes the heatwave lasts all year. Add the hot quarter to three normal ones growing 8%. The risk is that dealers stocked up and buy less in July to September.
Step 1Why does multiplying by four fail for a seasonal business?
An umbrella seller takes most of her year's money in the monsoon months. Nobody would take her July sales, multiply by twelve and call it her annual income. Multiplying a quarter by four assumes every quarter looks like that one, which is false for any business whose sales bunch in a season. Pellora's April to June quarter was 40% of last year; a normal quarter would be 25%. Multiplying it by four overstates the year by more than half before the heatwave is even counted.
Step 2Is dividing by the seasonal share good enough?
It is better, and it is still wrong here. Rs 1,560 crore divided by 40% gives Rs 3,900 crore, which assumes the whole year grows 30%. Annualise with the seasonal share only when the quarter's growth reflects the whole business; a heatwave lifts one quarter, so add that quarter to a normal rest of year instead. The other three quarters at 8% growth are Rs 648, Rs 583 and Rs 713 crore, Rs 1,944 crore in all, and the year comes to about Rs 3,504 crore.
| Method | Full year, Rs crore | Growth | What it assumes |
|---|---|---|---|
| Q1 x 4 | 6,240 | +108% | Every quarter is a peak summer quarter |
| Q1 / 40% seasonal share | 3,900 | +30% | The heatwave lifts all four quarters |
| Q1 plus normal rest of year | 3,504 | +17% | Only the hot quarter was boosted |
| Same, with Rs 100 crore of dealer stock reversing | 3,404 | +13% | Some Q1 sales were dealers stocking up |
Step 3What is the risk to the Rs 3,500 crore estimate?
Part of a heatwave quarter is often dealers filling their warehouses, not households buying. If Rs 100 crore of the quarter was dealer stocking, July to September will be that much weaker, and the year lands nearer Rs 3,404 crore. Ask for the company's comment on channel inventory, or check dealer checks, before you publish. Say the number and the risk together; that is what the interviewer is listening for.
Where candidates lose it
Multiplying by four is the trap, and it is easy to fall into when a results headline says revenue up 30%. It also shows up quietly in valuation, when a P/E is computed on an annualised peak quarter.
The subtler loss is fixing seasonality but keeping the heatwave growth for the whole year. One hot quarter is weather, not a new level of demand.
What the interviewer asks next
- How would you annualise Pellora's first-quarter EBITDA, given that fixed costs are spread evenly through the year?
- What data would tell you whether dealers are overstocked?
- Name another Indian sector where a single quarter dominates the year.
Company names and figures are illustrative.