Financial Modelling IT Sector

FINANCIAL MODELLING CASE STUDY IT SECTOR

Keerat Consulting Solutions (KCS), a leading IT name in India market, was started in the year 2013. In last
5 years, the company has grown leaps and bound and has successfully added new customers and
enhanced geographic presence. Currently the company provides the following IT services:

1. Software development
2. Software run and maintenance
3. Application Testing
4. IT consulting
5. Cloud Solutions

The historical profitability and financial position of KCS are given below:

Exhibit 1 Profit & Loss Statement

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 Financial Modelling IT Sector

Exhibit 2 Balance Sheet

The Managing Director of the company, Ms. Keerat Arora, scheduled a meeting and called upon all
business heads to understand the revenue and cost drivers and future expectations regarding those
drivers. Using those inputs, Ms. Keerat wants to project the financial profitability and financial position
of KCS for next 5 years. The meeting was quite constructive and informative. MDs secretary, Ms. Shikha,
made the following minutes of meeting (MOM):

1. The market is not too optimistic for the following business segments and as such revenue from
these segments are expected to grow at historical CAGR:
a. Software development
b. Software run and maintenance
c. Application Testing

2. KCS has recently hired Mr. Karan, an avid financial consultant and IT industry expert. In last
month, Karan had attended an international conference on IT industry prospects. Based on
speakers opinions and other discussions within the group, he understands that IT consulting
segment is expected to grow in the range of 20-22% over next 5 years. Further, the growth may
be limited to meager 5-6% in cloud business for next 3 years but after that this segment is
expected to witness a robust growth of 14-15% for next couple of years.

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 Financial Modelling IT Sector

3. All direct cost elements are expected to bear the same proportion to revenue as these had in
historical years.

4. Going forward, the management expects that the year-on-year (YoY) growth in facilities cost will
be 50 basis points (bps) lower than YoY growth in employee cost, while IT cost is expected to
increase in line with inflation for next years. Ms. Shikha was quick to get the inflation estimates
for India from IMF World Economic Outlook Database, Oct 2017.

5. Other overheads are also expected to grow in line with inflation.

6. The company had invested USD 625 million at time of inception and applied straight line
method (SLM) of depreciation considering an average useful economic life (UEL) of 25 years. In
order to sustain expanded scale of business, the company plans to invest USD 50 million in the
year 2020 and intends to depreciate the additional capex over the same economic life of 25
years.

7. The company had raised a debt of USD 400 million for a period of 10 years at fixed interest rate.

8. The company does not want to prepare different financial statements for taxable income
computation and instead the management is comfortable in using historical effective tax rate as
a high-level proxy for projected tax figures.

9. Accounts receivable and other current assets will follow the historical trend / average in terms
of proportion to companys revenue.

10. Marred by the habit to save money, the company fears hiring services of an actuary to help on
retirals forecast, hence the company decides to link retirals provisions to employee cost figures
based on trend witnessed in past.

11. Expense payables and other current liabilities may be projected by linking them to travel cost
and other direct cost (ODC) respectively.

Case Requirement:

Basis the above data points and facts, prepare an integrated financial model for next 5 years by using
modelling best practices. You may take suitable assumptions to prepare financial projections and make a
note of them.

Case prepared by Amardeep Singh; amardeep_singh@hotmail.com; (+91) 9711071834 Pg. 3