Case 065Forecasting and modellingCore
Ruvanta Steel Tubes lifts capacity from 1.0 to 1.6 million tonnes after a two-year build costing Rs 1,200 crore. With the new capacity running at 60%, 75% and 85% in its first three years, forecast volumes and asset turns.
1The situation
Ruvanta Steel Tubes has 1.0 million tonnes of capacity running at 85%, with a gross block of Rs 2,000 crore. It is building 0.6 million tonnes of new capacity for Rs 1,200 crore, spent evenly over two build years; the new plant starts at the beginning of year 1 and runs at 60%, 75% and 85% in years 1 to 3.
Average realisation is Rs 70,000 a tonne and EBITDA Rs 7,000 a tonne on both plants. Depreciation is 5% of gross block. Asset turn here means revenue divided by gross block plus capital work in progress.
2Your task
Forecast volumes, revenue and asset turns through the build and the first three years, and say what they tell you about returns on the new plant.
Quick check
What happens to Ruvanta's asset turns during the two build years?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Volumes go from 0.85 to 1.21, 1.30 and 1.36 million tonnes in years 1 to 3, and asset turns fall from 2.98x to 1.86x during the build before recovering to 2.98x only in year 3. The new plant earns a pre-tax return of 16% in year 1 rising to 25% at 85% use. New capacity earns returns only as utilisation climbs, so years 1 and 2 dilute returns.
Step 1How do you forecast volume when capacity arrives in a step?
A new restaurant opens with 60 covers but fills them over months, not on the first night. Model capacity and utilisation separately, then multiply: volume is capacity times utilisation, plant by plant. The old plant keeps producing 0.85 million tonnes. The new 0.6 million tonnes adds 0.6 x 60% = 0.36 in year 1, 0.45 in year 2 and 0.51 in year 3, so total volume is 1.21, 1.30 and 1.36 million tonnes.
Step 2Why do asset turns dip before they recover?
Capital is spent before any tonne is sold. During the build, Rs 600 crore a year goes into capital work in progressMoney spent on assets that are not yet in use. It sits on the balance sheet but earns nothing until the asset is commissioned. while revenue stays at Rs 5,950 crore. Turns fall from 2.98x to 1.86x and do not get back to where they started until the new plant runs at the old plant's 85%. Both plants cost Rs 20,000 a tonne of capacity, so at equal utilisation they turn over equally.
| Today | Build yr 1 | Build yr 2 | Year 1 | Year 2 | Year 3 | |
|---|---|---|---|---|---|---|
| Capacity, mt | 1.00 | 1.00 | 1.00 | 1.60 | 1.60 | 1.60 |
| Volume, mt | 0.85 | 0.85 | 0.85 | 1.21 | 1.30 | 1.36 |
| Revenue, Rs crore | 5,950 | 5,950 | 5,950 | 8,470 | 9,100 | 9,520 |
| Gross block plus CWIP, Rs crore | 2,000 | 2,600 | 3,200 | 3,200 | 3,200 | 3,200 |
| Asset turn | 2.98x | 2.29x | 1.86x | 2.65x | 2.84x | 2.98x |
Step 3What does this say about returns on the Rs 1,200 crore?
Take the new plant on its own. EBITDA at Rs 7,000 a tonne is Rs 252, Rs 315 and Rs 357 crore over years 1 to 3; less Rs 60 crore of depreciation, pre-tax return on the Rs 1,200 crore is 16.0%, 21.2% and 24.8%. New capacity earns its full return only once utilisation matches the old plant's, and until then it pulls the company's return down. The old plant earns 24.8% pre-tax, the same as the new one at 85%. Every year the ramp slips pushes that date out, so the utilisation path is the assumption to stress, together with realisation, which new supply in the industry can pressure.
Where candidates lose it
The standard loss is running the new capacity at full or at the old plant's utilisation from day one. Revenue in year 1 is then overstated by about Rs 1,050 crore and the dip in returns disappears.
The second is leaving capital work in progress out of the asset base during the build, which makes turns look stable when cash has already left the company.
What the interviewer asks next
- If the new plant's ramp slips by a year, what happens to year 2 revenue and asset turns?
- How would you forecast working capital for the extra volume?
- Realisation falls to Rs 65,000 a tonne as the industry adds capacity. What is the new plant's year 3 return?
Company names and figures are illustrative.