Ayesha Fazal

43-B 43rd St, Block-6 Block 6 PECHS, Karachi, Karachi City, Sindh--B 43rd St, Block-6 Block 6 PECHS, Karachi, Karachi City, Sindh 74400 FINANCIAL MANAGEMENT PROJECT COMPANY CHOSEN: KEENU GROUP MEMBERS Ayesha Fazal Amama Khurram Contents ABOUT COMPANY ........................................................................................... 4 Analysis and Interpretation ................................................................................ 6 Forecasted Income statement .............................................................................. 6 Balance sheet ........................................................................................................ 8 AFN..................................................................................................................... 10 Capital Structure ............................................................................................... 11 Corporate Valuation .......................................................................................... 14 Analysis of Graphs ............................................................................................. 17 Income Statement Analysis ............................................................................ 17 Net Profit Analysis ............................................................................................. 18 FCF Analysis ...................................................................................................... 19 Conclusion .......................................................................................................... 20 Recommendation ............................................................................................... 21 ABOUT COMPANY Keenu: Empowering Digital Payments Over the last decade, Keenu has been at the forefront of digitizing payments in Pakistan. Keenu has emerged as a successful home-grown FinTech brand contributing towards the dream of digital Pakistan by enhancing the financial inclusion of thousands of businesses. Mission Statement: “Keenu’s mission is to brighten lives by building the capacity to deliver uninterrupted, safe, and affordable power to the people of Karachi. We are committed to ensuring that every citizen has access to reliable electricity, contributing to their well-being and prosperity.” Vision Statement: “The vision at Keenu is to restore and maintain pride in our organization, the city of Karachi, and ultimately, Pakistan. We aspire to be a driving force in the digital transformation of payments, enhancing financial inclusion, and contributing to the dream of a digital Pakistan.” 1-Background: Founding Year: Keenu was established in 2013. Financial Inclusion: Keenu plays a crucial role in enhancing financial inclusion for thousands of businesses across the country. 2- Achievements: Digital Transformation: Keenu has demonstrated unwavering commitment to the digitalization of payment processes, paving the way for seamless and efficient transactions. Customer Trust: We extend our heartfelt gratitude to our valued customers for placing their trust in us, thereby becoming integral members of the ever-expanding Keenu family. Employee and Partner Contributions: The remarkable success achieved by Keenu is a testament to the relentless dedication of our employees, partners, and collaborators. Their invaluable contributions have been instrumental in our journey towards excellence. 3-Regulation and Licensing: Keenu (operated by Wemsol Pvt Ltd) is licensed and regulated by the State Bank of Pakistan as an Electronic Money Institution (EMI). 4-Future Commitment: As they look ahead, they remain committed to building customerfocused solutions. Their journey continues, and they are determined to keep delivering on their promise to drive digital transformation in Pakistan. Competition 1-Keenu’s separate businesses have different competitors. 2-Point of Sale business has HBL and Bank Alfalah as the biggest competitors. 3-Keenu wallet’s biggest competition in Digital Market is FonePay, SimSim wallet , Jazz Cash and ARY sahulat. 4-Keenu’s software wing has many competitors in third world countries, providing software development on low cost to first world countries, like Axact and Tradekey in Pakistan. Analysis and Interpretation Forecasted Income statement The forecasted income statement for the upcoming seven years and the forecast is done on the basis of the available data -). The sales growth rate is taken as the growth rate of the 2022 and 2023. The sales growth percentage is 12%. This percentage is then used to forecast the sales of the years-. Cost of goods sold is then calculated on the basis of the percentage it holds against the sales in 2022. Then used this percentage to calculate the CGS of the years-. Gross profit is then calculated by deducting the CGS from the Revenue. The sales of the company KEENU increased drastically after the 2022 due to which gross profit margin was very high in the following years. Other expenses are also calculated by taking the 2022 as the base year and 2023 as the current year. The other expenses increased drastically over the years. Next head that we will be discussing is the Taxation, it is well known factor that every company has to pay a portion of its company’s profit to the government. The percentage of the taxes are allocated by the government when finance bill is announced. The Tax rate allocated by the government is 25% and we have forecasted the future income statements according to this rate assuming it will remain constant. There is an overall increase in company’s Net Profit and there is an overall increase in the company’s Operating Expenses. There is a positive trend in the company’s Net Sales; it has drastically increased over 7 years with a Ratio of 12%, calculated on the basis of existing data of-. Balance sheet The Forecasted balance sheet for seven years -). To do the analysis of any company there are four types of financial statement an analyst require which includes 1) Balance Sheet 2) Income statement 3) Cash flow Statement 4) Statement of changes in equity. In Balance sheet, we analyze the Assets, Liabilities and Equity of the company. The first thing that we will discuss about is Cash. We had calculated the cash as the ratio of the sales of the company. The cash is 5.25 percent of the sales and in this case the cash is increasing with the sales increased. Next in current assets we have account receivables which are the credit sales to the customers. The receivables should be dealt correctly for both making the new customers and retaining the old customers. The receivables are 4.39 percent of the sales and are increasing with the increased sales which Property plant and Equipment are treated as the Non-current assets. Intangible Assets are the assets bought by the company which can be in the form of the shares. The intangible assets are increasing by the constant sales growth rate of 2422 percent which is drastic figure. These means that the extra cash that the company holds is being invested in the other company stocks. There is a constant increase in company’s PPE with a sales growth of 12.991 percent. Current Liabilities are financial obligations that a company expects to settle within a relatively short period, typically within one year. Here we can see an increase in forecasted current liabilities over seven years may suggest growing business operations but could also indicate challenges in managing working capital effectively. AFN AFN (Additional Funds Needed) is financial concept used when a business looks to expand its operations. Since a business that seeks to increase its sales level will require more assets to meet that goal, some provision must be made to accommodate the change in assets. AFN is calculated by the formula of AFN which is It can be negative or positive. When the AFN is negative, it means that the action or project which is being undertaken will generate extra income for the company, which can be invested elsewhere. If the AFN is positive after computation, it means that additional capital is needed for the business to operate, which results in a rise in notes or loan payables. Interpretation: For our company, during the years- the AFN is forecasted to be negative, exhibiting a positive income flow for the company. For the year 2028, the AFN is 0 since AFN uses change in sales to calculate next year's additional funds hence we won’t be calculating for 2028 as we have not forecasted the data for 2029. As our forecasted AFN values are negative, it shows that the company is not in need of additional funding. Meanwhile, the additional funds can be used to reinvest in the company for better opportunities, as a source to generate more income and to expand the already growing business. Capital Structure The capital structure provides valuable insights into how a company finances its operations, its financial stability, risk profile, and cost of capital, which are essential considerations for investors, creditors, and management. Beta represents the risk of a particular stock or portfolio of stocks as compared to the risk of marked. Unlevered beta is used where the company is solely financed by equity and where debt is used we can calculate beta by the hamada equation. Rf shows the risk-free rate while Mrp is the market risk premium. Rf shows the return on investment where there is no risk involved which is generally decided by the government. MRP shows the difference between Market return and Rf. Wd is the weight of debt, and We is the weight of equity, D/s shows the ratio of debt-to-equity mix. Furthermore, Rd is the rate of debt which can be classified as interest. It can be calculated by the following formula: Likewise, the Cost of equity is the return the company has to pay on any investment received. It is calculated through the CAPM formula which is: WACC is the weighted average cost of capital which means the return the company has to pay in order to finance its assets. A higher WACC might signal a riskier investment to investors. It is calculated by the following formula: Using all these formulas and applying them on the existing values derived either from the Income Statement and Balance Sheet, we get the following results and interpretations. The following calculations are made to derive the Current Capital Structure and also find out the Optimal Capital Structure for our company. Current Capital Structure: The current capital structure of the company is 25% debt and 74% equity financed. At this D/s the company has a rd of 0.1045% , rs 0.2715%, and WACC is 22.30% and the VOP is-. We are still operating at a good capital structure but the WACC is still not at its lowest nor is the VOP at its full potential. For that, we have to calculate the Optimal Capital Structure. Optimal Capital Structure: To identify the optimal capital structure, we have calculated the WACC of different possible debt-to-equity mixes to identify which capital structure will give the minimum WACC. In this case, the capital structure is the optimal structure of the company as the lowest WACC and Highest VOP is at the current structure of the company. A lower WACC would mean that the company will be able to finance its assets at a lower rate. Interpretation: The optimal Capital Structure of the company is Debt at 40%, Equity at 60% and WACC is 21.64 and the VOP is-. If the company chooses any other mix other than the optimal one its WACC will increase, and the Value of operations will fall. This will not only increase the cost to the company, but the total value of the firm might also decrease. Corporate Valuation Corporate valuation is used to calculate the overall value of the company. It can also be calculate for the overall cash flows that a new project will bring in if it is opted against the initial cash outflow. Keenu has a steady increase in its net working capital which is calculated through the formula Which include subtracting current liabilities (Account payable and accrued liabilities) from the current assets (inventory, cash balance, account receivables). Similarly, we calculate the NOPAT of the company which is increasing as the EBIT of the company increases. Net required investment is calculated by subtracting the previous operating capital for current year operating capital, which is positive as the operating capital is rising. Free cash flow (FCF): It represents the cash that a company generates after accounting for cash outflows to support operations and maintain its capital assets. FCF of the company is positive and increasing in all years from- which is good sign for the company. It also serves as a better metric than earning. Horizon Value: It tells us the present value at a future point in time of all future cash flows when we expect stable growth rate forever. The WACC calculated in 2022 is 22.3% and after 2027 FCF is expected to grow at a constant rate which is 3% which is known as horizon value (Constant growth). The horizon value of KEENU for 2027 is 374,143,628.06. Its formula is Value of Operations: In order to calculate the value of operation of current year, we add the present values of horizon value and all FCF’s. In order to calculate the total worth of the company we add short term investments to value of operations. Following are the calculations. Dividend Growth Model The dividends of the company are projected to increase over the course of the forecasted years from PKR 6,648,844.21 in 2024 to PKR 10,324,825.89 in 2028 while the retention ratio or the portion of earnings retained for reinvestment remains relatively stable around 6% throughout the forecast period. A high payout ratio means the company is distributing most of its profits to shareholders, leaving less for reinvestment. The dividends are expected to grow at a rate that lies somewhere in the 1114% range. Analysis of Graphs Income Statement Analysis The graph above shows the revenue growth for the year- where we have kept 2021 as the base year for future fluctuations, the graph clearly shows a positive increase in the sales revenue for the year ahead which is a very good sign however this is not the only criteria for performance of a firm as there are many other factors which account in the financial performance of a firm which we also look at ahead. Net Profit Analysis The graph reflects a positive trend in net profit over a seven-year period. The net profit consistently increases from year 1 to year 7. This upward trend suggests that the company’s financial performance has improved over time. The net profit starts around PKR 10 million in year 1 and reaches approximately PKR 80 million in year 7. The substantial growth indicates successful business operations. The line on the graph is ascending, indicating steady and sustained growth. The company’s profitability has been on an upward trajectory. FCF Analysis The FCF consistently increases from year 1 to year 7. This upward trend suggests that the company’s financial health has improved over time. The initial FCF value starts around PKR 10 million in year 1. By year 7, the FCF has surged significantly, reaching approximately PKR 80 million. The company’s ability to generate positive cash flow has strengthened consistently over the years. Conclusion  Sales Growth and Profitability: Keenu has experienced a significant increase in sales over the forecast period, contributing to a rise in gross profit margin. However, while net profit has increased overall, it's important to analyze whether this growth is sustainable and whether profitability ratios remain favorable.  Operating Expenses and Taxation: The company has witnessed a rise in operating expenses and is subject to a constant tax rate of 35%. This suggests the need for effective cost management strategies to maintain profitability amidst increasing expenses.  Balance Sheet Analysis: Keenu's balance sheet reveals a steady increase in current assets, driven by rising sales, while intangible assets have also grown substantially. However, careful attention should be paid to managing current liabilities, especially as they have increased over the forecast period.  AFN and Capital Structure: The Additional Funds Needed (AFN) analysis indicates a need for additional capital in the earlier years of the forecast, potentially due to rapid growth. The optimal capital structure of 40% debt and 60% equity minimizes the weighted average cost of capital (WACC), maximizing the value of operations (VOP).  Corporate Valuation: Keenu's corporate valuation highlights a steady increase in free cash flows (FCF) and a positive outlook for future growth, supported by a constant growth rate assumption. The company's value of operations and price per share reflect its overall worth and potential return for investors. Recommendation Based on the analysis and interpretation of Keenus' forecasted income statement, balance sheet, corporate valuation, capital structure, and dividend policy, the following recommendations can be considered:  Optimize Working Capital Management: Given the increase in current liabilities over the forecast period, Keenu should focus on optimizing working capital management to ensure efficient utilization of resources and mitigate the risk of cash flow challenges. Implementing robust inventory management systems and optimizing accounts receivable and payable cycles can help in this regard.  Strategic Cost Control Measures: Keenu should implement strategic cost control measures to manage the rise in operating expenses effectively. This may involve identifying costsaving opportunities across various operational areas, negotiating favorable terms with suppliers, and streamlining internal processes to improve efficiency.  Diversification of Revenue Streams: While the forecast indicates robust sales growth, Keenu should consider diversifying its revenue streams to reduce dependency on a single source of income. Exploring new market segments, introducing innovative products or services, and expanding geographical reach can help mitigate risks associated with overreliance on a particular market or product.  Optimal Capital Structure Management: The analysis highlights the importance of maintaining an optimal capital structure to minimize the weighted average cost of capital (WACC) and maximize the value of operations (VOP). Keenu should periodically review its debt-to-equity ratio and adjust financing strategies to capitalize on favorable market conditions while balancing financial risk.  Investment in Research and Development (R&D): Given the substantial increase in intangible assets and the company's focus on growth, Keenu should consider allocating resources towards research and development initiatives. Investing in R&D can drive innovation, enhance product differentiation, and sustain long-term competitiveness in the market.  Investment Opportunities and Reduction in Dividends: As Keenu’s payout ratio is extremely large compared to its retention ratio, it is recommended to use the negative additional forecasted funds needed for purpose o reinvestment rather than distributing the income with shareholders. While high dividends can attract income-seeking investors, it also implies limited opportunities for profitable reinvestment.  Continuous Monitoring and Evaluation: It is essential for Keenu to establish robust monitoring and evaluation mechanisms to track financial performance, identify emerging trends, and assess the effectiveness of implemented strategies. Regular reviews of financial statements, key performance indicators, and market dynamics will facilitate timely decisionmaking and course correction as needed. Appendix: Income statement and Balance sheet: To establish the financial position of Keenu, we utilized data from three comparable Fintech startups: Kasb, NayaPay, and Tez Financial Services as well as a giant in the industry; JazzCash.. Their financial statements were averaged to approximate Keenu's performance for the initial two years. AFN: We computed the Additional Funds Needed (AFN) for the years 2023 through 2026. Remarkably, the AFN values were negative, suggesting that Keenu doesn't require further external funding during this period and investments with a short duration rise. Capital Structure: Following assumptions for made to compute the Current and Optimal Structure values for the company. 1. Treasury Bill (KSE 100) is 21.49 2. Market Return is 26 3. Levered Beta is 1.25 4. On that basis, estimated unlevered beta will be 1 5. Cost of debt (rd) increases at 0.5% with increasing levels of debt Dividend Growth Model: Given the absence of explicit dividend information, we employed the Dividend Growth Model. We assumed dividends as a percentage of net income or profit for each respective year. This approach provides a coherent framework for estimating dividends in the absence of explicit data, aligning with industry standards and financial modeling practices.