Case 099Earnings and resultsWarm up
An appliance maker raised prices 5% from the second month of a quarter in which revenue was Rs 900 crore. At flat volumes, how much extra revenue does the full-quarter effect add next quarter?
1The situation
Brivanta Appliances makes fans, mixers and water heaters. It raised prices 5% across its range at the start of the second month of the quarter just reported, in which revenue was Rs 900 crore. Volumes were flat month to month through the quarter.
On the call, a colleague writes in a note that the full effect of the price hike, 5% of Rs 900 crore or Rs 45 crore, will show up in next quarter's revenue.
2Your task
At flat volumes, what is next quarter's revenue, and what is wrong with the colleague's Rs 45 crore?
Quick check
How much higher is next quarter's revenue than this quarter's, at flat volumes?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Next quarter's revenue is about Rs 914.5 crore, only Rs 14.5 crore more than this quarter. One old-price month is worth Rs 290.3 crore, since 900 is that month plus two months 5% higher. Two thirds of the hike, Rs 29.0 crore, is already in this quarter; next quarter adds the last third. The colleague's Rs 45 crore is the hike's effect against a quarter with no hike at all.
Step 1What was one month worth before the hike?
Work backwards from the quarter. Call one month at the old price m. The quarter is m plus two months at 1.05m: 3.1m equals Rs 900 crore, so m is Rs 290.32 crore. A mid-quarter change shows only partly in the quarter it happens, so you must first strip the quarter back into its months. A tenant whose rent rose from the second month of a quarter already paid two months at the new rate; the next quarter's bill rises by only one month's worth of the increase.
Step 2So what does next quarter look like?
Three months at the new price: 3 x 1.05 x 290.32, Rs 914.52 crore. The sequential gain is Rs 14.5 crore, 1.6%, not Rs 45 crore; two thirds of the hike, Rs 29.0 crore, has already been reported. The full quarterly effect of the hike is Rs 43.5 crore, but only when compared with a quarter that had no hike, such as the same quarter last year. Say which comparison you mean: sequential, against this quarter, or year on year, against an unhiked quarter.
| Rs crore | Month 1 | Month 2 | Month 3 | Quarter |
|---|---|---|---|---|
| No hike at all | 290.3 | 290.3 | 290.3 | 871.0 |
| This quarter, hike from month 2 | 290.3 | 304.8 | 304.8 | 900.0 |
| Next quarter, flat volumes | 304.8 | 304.8 | 304.8 | 914.5 |
Step 3What would you check before putting this in a model?
Whether volumes really stay flat. Appliance demand is seasonal, so a flat-volume assumption across quarters is rarely true: fans sell in summer, water heaters in winter. Check too whether dealers bought ahead of the hike in month one, which would flatter month one and depress months two and three, and whether competitors followed with their own increases. The sequentialCompared with the immediately previous quarter rather than the same quarter a year earlier. gain from price is Rs 14.5 crore; volume and mix will usually move revenue by more.
Where candidates lose it
The trap is the colleague's note: 5% of the whole quarter as the next-quarter gain. It forgets that two months of the hike are already inside the Rs 900 crore, and it triples the sequential effect.
The second miss is getting Rs 14.5 crore without saying against what. The same hike is worth Rs 43.5 crore against last year's quarter, so name the comparison.
What the interviewer asks next
- The hike had started in month three instead. What is the next-quarter gain?
- Dealers stocked up in month one ahead of the hike. How would that distort the months?
- How would you show the price effect separately from volume in a results preview?
Company names and figures are illustrative.