Combating the Yoga Guru: Dabur's Dilemma Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Combating the Yoga Guru: Dabur's Dilemma case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Combating the Yoga Guru: Dabur's Dilemma case study is a Harvard Business School (HBR) case study written by Manaswini Bhalla, Koustav Dey, Pulkit Aggarwal. The Combating the Yoga Guru: Dabur's Dilemma (referred as “Patanjali Fmcg” from here on) case study provides evaluation & decision scenario in field of Global Business. It also touches upon business topics such as - Value proposition, .

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Combating the Yoga Guru: Dabur's Dilemma Case Study

The case intends to introduce the reader to a disruption in the Indian FMCG industry. A single new entrant, Patanjali entered the FMCG industry in 2006, combating incumbents and attacking them on all fronts. Within a short span of time, it was able to produce results and exceed industry expectations. The case starts with the evolution story of Dabur, the world's largest Ayurvedic and natural healthcare company. It indicates the major milestones of the company and how it has been able to combat all sorts of threats but retain the top spot in many of the segments it operates in, over the years. The case then discusses a potential threat to Dabur from the new entrant, Patanjali. Building on its Ayurveda brand, Patanjali launched a foray of FMCG products and, drastically reduced prices. Using the power of a Yoga guru that made the product so widely accepted among the Indian masses, Patanjali is threatening every FMCG giant in the country. The case then goes on to depict how Patanjali seems to have gone on a direct frontal attack against all existing big players. The case is written from the perspective of Dabur to understand the nature of competition it faces from Patanjali.

Case Authors : Manaswini Bhalla, Koustav Dey, Pulkit Aggarwal

Topic : Global Business

Related Areas :

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Calculating Net Present Value (NPV) at 6% for Combating the Yoga Guru: Dabur's Dilemma Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10027070)	-10027070	-	-
Year 1	3471122	-6555948	3471122	0.9434	3274643
Year 2	3980170	-2575778	7451292	0.89	3542337
Year 3	3948328	1372550	11399620	0.8396	3315092
Year 4	3225072	4597622	14624692	0.7921	2554559
TOTAL			14624692		12686632

The Net Present Value at 6% discount rate is 2659562

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Internal Rate of Return
2. Payback Period
3. Profitability Index
4. Net Present Value

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Timing of the expected cash flows – stockholders of Patanjali Fmcg have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.
2. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Patanjali Fmcg shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.

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Formula and Steps to Calculate Net Present Value (NPV) of Combating the Yoga Guru: Dabur's Dilemma

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Global Business Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Patanjali Fmcg often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Patanjali Fmcg needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10027070)	-10027070	-	-
Year 1	3471122	-6555948	3471122	0.8696	3018367
Year 2	3980170	-2575778	7451292	0.7561	3009580
Year 3	3948328	1372550	11399620	0.6575	2596090
Year 4	3225072	4597622	14624692	0.5718	1843945
TOTAL					10467982

The Net NPV after 4 years is 440912

(10467982 - 10027070 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10027070)	-10027070	-	-
Year 1	3471122	-6555948	3471122	0.8333	2892602
Year 2	3980170	-2575778	7451292	0.6944	2764007
Year 3	3948328	1372550	11399620	0.5787	2284912
Year 4	3225072	4597622	14624692	0.4823	1555301
TOTAL					9496822

The Net NPV after 4 years is -530248

At 20% discount rate the NPV is negative (9496822 - 10027070 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Patanjali Fmcg to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Patanjali Fmcg has a NPV value higher than Zero then finance managers at Patanjali Fmcg can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Patanjali Fmcg, then the stock price of the Patanjali Fmcg should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Patanjali Fmcg should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What can impact the cash flow of the project.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What will be a multi year spillover effect of various taxation regulations.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Combating the Yoga Guru: Dabur's Dilemma

References & Further Readings

Manaswini Bhalla, Koustav Dey, Pulkit Aggarwal (2018), "Combating the Yoga Guru: Dabur's Dilemma Harvard Business Review Case Study. Published by HBR Publications.