Case 015Earnings, models and KPIsHard
Zenaris Consumer reports quarterly revenue of Rs 1,260 crore, up 20%. Distributor checks show their stock rose from 30 to 45 days of end sales, with end sales running at Rs 12 crore a day. How much of the quarter is channel filling, and what is the underlying growth?
1The situation
Zenaris Consumer sells packaged snacks and drinks through distributors, who sell on to shops. It books revenue when goods leave its warehouse for a distributor. This quarter Zenaris reported revenue of Rs 1,260 crore, up 20% on Rs 1,050 crore a year ago, well above the market's expectation, and the stock rose 8%.
Your channel checks with distributors show that sales from distributors to shops, end sales, ran at about Rs 12 crore a day through the 90 day quarter. Distributor stock of Zenaris products rose from 30 days of end sales at the start of the quarter to 45 days at the end. A year ago distributor stock was steady at 30 days.
2Your task
How much of the reported revenue is channel filling, what is the underlying growth, and what does it mean for next quarter and for the stock?
Quick check
Roughly what is Zenaris's underlying growth once the stock build is removed?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
About Rs 180 crore, 14% of the quarter's revenue, is stock pushed into distributors, and underlying growth is only about 3%. End customers bought Rs 1,080 crore, 12 a day for 90 days, against Rs 1,050 crore a year ago. If distributors run their stock back to 30 days next quarter, sell-in drops to about Rs 900 crore, 14% below last year. The beat borrows from next quarter.
Step 1Why can reported revenue grow faster than what customers buy?
Zenaris books revenue when it ships to distributors, and distributors can take more than they sell. Think of a milk supplier who fills the shopkeeper's fridge to bursting on the last day of the month: his monthly sales jump, but nobody drank more milk. Sell-in equals end sales plus the change in channel stock, so any rise in distributor stock shows up as revenue that no customer has bought yet. Management calls it strong demand; the stock days tell you whether it is.
| End sales | distributor sales to shops, 12 a day for 90 days, Rs 1,080 crore |
| Channel stock | distributor stock: 30 days of 12, Rs 360 crore, rising to 45 days, Rs 540 crore |
Step 2How big is the channel fill, and what is left?
Convert the days into rupees. Distributor stock went from 30 days of Rs 12 crore, Rs 360 crore, to 45 days, Rs 540 crore, so Rs 180 crore of the quarter's revenue is stock sitting in the channel. End-customer sales were Rs 1,080 crore. Last year stock was flat, so last year's revenue of Rs 1,050 crore was also its end sales, and like-for-like growth is 1,080 over 1,050, about 2.9%, not 20%.
| Rs crore | Last year | This quarter | Next quarter if stock normalises |
|---|---|---|---|
| End-customer sales | 1,050 | 1,080 | 1,080 |
| Change in distributor stock | 0 | +180 | -180 |
| Reported revenue (sell-in) | 1,050 | 1,260 | 900 |
| Growth on last year | 20.0% | -14.3% |
Step 3What happens next quarter?
Distributors do not hold 45 days of snacks for long: it ties up their cash and the products have a shelf life. If they run stock back to 30 days while end sales hold at Rs 1,080 crore, Zenaris ships only about Rs 900 crore next quarter, 14% below last year's quarter. The 20% this quarter and the fall next quarter are the same Rs 180 crore counted once in each direction. Some of the build may unwind over two quarters rather than one, but it has to unwind unless end sales accelerate.
Step 4What would you check, and what is the trade?
Confirm with the company's own numbers. Look for receivables from distributors rising faster than revenue, longer credit terms or special schemes offered at quarter end, and a gap between Zenaris's growth and that of retail sales data for the category. Management may argue distributors stocked up ahead of a price rise or a festival, which is a fair reason if it is disclosed and if the prior year shows the same pattern. The view for the PM: the 8% jump prices in growth that end customers have not delivered, which makes Zenaris a candidate short into next quarter's results, sized for the risk that end sales really are accelerating.
Where candidates lose it
The trap is taking reported revenue as demand. Candidates who model 20% growth forward have built next year's forecast on stock sitting in distributor warehouses.
The second is computing the fill and stopping. The Rs 180 crore has to come back out, so the interviewer wants the next quarter's number too: channel stuffing moves revenue between quarters, it does not create it.
What the interviewer asks next
- Distributor stock was 40 days at the same point last year and fell to 30. How does that change the underlying growth?
- How would you run distributor channel checks without breaching any rule on material non-public information?
- Zenaris's receivable days rose from 25 to 40 this quarter. How does that fit your story?
Company names and figures are illustrative.