Module 04 · Solutions

Kaveri figures ₹ Cr; all arithmetic verified in Python.

Warm-up

E04.01 FY21–26: (1,318/612)^(1/5) − 1 = 16.6%; FY23–26: (1,318/874)^(1/3) − 1 = 14.7%. The longer window includes FY22's +24% (a low COVID base in FY21); the three-year window is the better guide to the current trajectory.

E04.02 Gross margin moves → price, input cost, mix. EBITDA margin (gross stable) → overheads/scale. EBIT margin (EBITDA stable) → depreciation (capex). PAT margin (EBIT stable) → interest, other income, exceptional items, tax.

E04.03 ROE = PAT ÷ average equity (post-tax). ROCE = (EBIT + other income) ÷ average (equity + borrowings + lease liabilities) — pre-tax. ROIC = EBIT × (1 − t) ÷ average invested capital (net fixed assets + CWIP + ROU + intangibles + NWC), post-tax, excluding cash.

E04.04 DIO = inventory/COGS × 365; DSO = receivables/revenue × 365; DPO = payables/COGS × 365; CCC = DIO + DSO − DPO (days of operating cash tied up between paying suppliers and collecting from customers).

E04.05 Net debt = borrowings (+ leases) − cash − liquid investments. Net debt/EBITDA = years of EBITDA to repay. Interest cover = EBIT ÷ finance costs. DSCR = (EBITDA − cash taxes) ÷ (interest + scheduled principal).

E04.06 Basic EPS = PAT to owners ÷ weighted shares; diluted adds in-the-money options/convertibles (treasury-stock method); BVPS = equity ÷ shares; payout = dividends ÷ PAT; FCF yield = FCF ÷ market cap.

E04.07 (PAT − CFO) ÷ average total assets: the non-cash share of profit. Sloan (1996) showed high-accrual firms' earnings are less persistent and their subsequent stock returns lower, because investors under-discount accruals.

Core

E04.08 CAGRs: agri 3.3%, industrial 10.7%, solar 79.8%. Increase FY23→26 = 444.0: agri 55.6 (13%), industrial 93.7 (21%), solar 294.7 (66%). Two-thirds of the "14.7% CAGR" came from the segment with the worst working capital and margins; ex-solar the CAGR was ~5.7%.

E04.09 FY26: materials 65.1%, employees 8.9%, other 12.2%, D&A 3.6%, finance costs 1.3% (FY24: 63.2 / 9.0 / 12.4 / 3.3 / 1.3). EBITDA margin 13.8% vs 15.4%: the 190-bp materials increase (mix toward solar) explains the entire decline; overheads were flat.

E04.10 DOL = 348.8/134.1 = 2.6. Revenue −10%: contribution 313.9 − fixed 214.7 = ₹99.2 Cr EBIT (−26%).

E04.11 Blended FY24 = 0.57×40 + 0.29×36 + 0.14×22 = 36.32%; FY26 = 0.46×40 + 0.27×36 + 0.27×24 = 34.60%. Mix effect = (FY26 weights × FY24 margins) − FY24 = (18.4 + 9.72 + 5.94 = 34.06) − 36.32 = −2.26 pp; rate effect = 34.60 − 34.06 = +0.54 pp. The decline is mix; solar's own margin improved.

E04.12 ROE = 90.5/671.7 = 13.5%; ROCE = 138.0/868.1 = 15.9%; ROIC = 134.1 × 0.7483 / 836.8 = 12.0%. ROCE × (1 − t) ≈ 11.9% ≈ ROIC: the gap is almost all tax; the denominator difference (cash and DTL) nets to a small residual.

E04.13 3-step: 6.87% × 1.2095 × 1.6224 = 13.5%. 5-step: tax burden 0.748 × interest burden 0.877 × EBIT margin (incl. OI) 10.47% × 1.2095 × 1.6224 = 13.5%. From FY24 (net margin 8.6%, turnover 1.20, leverage 1.61): turnover and leverage barely moved; the net margin fall (8.6% → 6.9%) is the whole story — and within it, the EBIT margin (12.8% → 10.5%) plus a slightly heavier interest burden.

E04.14 (100.3 − 91.4)/(886.8 − 690.6) = 8.9/196.2 = 4.5% (4.6% before rounding of NOPAT) vs average ROIC 12.0%: the marginal ₹196 Cr (mostly receivables) earned well below WACC; the average is flattered by the older asset base.

E04.15 Net reinvestment = 52.0 + 89.7 − 47.8 = 93.9; rate = 93.9/100.3 = 94%; supported growth at 12% ROIC ≈ 11.2% vs actual 12.5%. Consistent — but 94% reinvestment to grow 12% is a poor exchange rate.

E04.16 DIO = 188.1/858.0 × 365 = 80; DSO = 346.7/1,318 × 365 = 96; DPO = 143.4/858.0 × 365 = 61; CCC = 115 days (71 in FY22). NWC = 365.0 = 27.7% of revenue.

E04.17 Receivables at 80 days = 1,318 × 80/365 = 288.9; release = 346.7 − 288.9 = ₹57.8 Cr. CFO would be 65.1 + 57.8 = ₹122.9 Cr; FCF = 122.9 − 52.0 = ₹70.9 Cr (vs ₹13.1 Cr).

E04.18 FY26: CFO/EBITDA = 65.1/181.9 = 35.8%; CFO/PAT = 71.9%; FCF = 65.1 − 48.0 − 4.0 = ₹13.1 Cr. FY24–26: CFO 212.6; EBITDA 509.2 → 41.8%; PAT 274.3 → 77.5%; capex 261.0 → FCF −₹48.4 Cr.

E04.19 Maintenance capex ≈ D&A = ₹47.8 Cr; growth capex = 52.0 − 47.8 = ₹4.2 Cr. Reasonable now (no new plant; Hosur at 57%), but the proxy overstates maintenance in a year when the asset base is new (little needs replacing) and understates it for old plants — Greenwald's method (capex per unit of sales × sales growth) would put maintenance lower in FY26.

E04.20 Net debt ex-leases = 188.0 − 47.5 = 140.5; incl. leases 158.7. Net debt/EBITDA 0.77x / 0.87x; D/E = 188.0/706.1 = 0.27x; interest cover 134.1/17.0 = 7.9x; DSCR = (181.9 − 29.5)/(17.0 + 20.0) = 4.1x.

E04.21 Revenue 1,120.3; EBITDA 112.0; debt 248.0; interest ≈ 15.6 × 248/188 + 1.4 = 22.0; EBIT = 112.0 − 47.8 = 64.2; cover 2.9x; net debt/EBITDA (248 − 47.5)/112 = 1.79x. Stressed but solvent.

E04.22 Bank guarantees ₹96 Cr (performance — not debt; monitor); GST demand ₹38 Cr (probability-weight ~50% → ₹19 Cr add to net debt); income-tax disputes ₹11 Cr (weight ~30% → ₹3 Cr); lease liabilities ₹18.2 Cr (already debt-like); promoter pledge (not company debt; governance). Adjusted net debt ≈ 158.7 + 19 + 3 ≈ ₹181 Cr → ~1.0x EBITDA.

E04.23 EPS basic ₹15.08, diluted ₹14.91; BVPS 706.1/6.0 = ₹117.7; DPS paid ₹4.0; payout 24.0/90.5 = 26.5%. At ₹390: P/E 25.9x; P/B 3.3x; EV = 2,340 + 140.5 + 18.2 = 2,498.7 → EV/EBITDA 13.7x; FCF yield 13.1/2,340 = 0.56%.

E04.24 Accruals = (90.5 − 65.1)/1,089.7 = 2.3%. Scorecard (FY26): CFO/PAT 2; accruals 1; receivables vs revenue 2; Beneish 1 (−2.14); exceptional 0; other income 0; RPT 2; provisioning 2; tax 0; governance 1 → 11: profit overstates cash-generating power by ~20–30% until receivables resolve; not fraudulent.

E04.25 NII 9.24; fees 0.74; opex −3.53; PPOP 6.45; credit cost −1.77; tax −1.18; RoA 3.51% × leverage 4.29 = RoE 15.1%. Credit cost 4.0% of 6,350 = 254.0: PBT = 440.6 − 254.0 = 186.6; PAT 139.6; RoE = 139.6/1,590.55 = 8.8%.

E04.26 PAT margins: Nilgiri 10.5%, Deccan 5.9%, Sabarmati 9.8%, Konkan 6.8%, Kaveri 6.9%. Rankings: ROCE — Nilgiri 24 > Sabarmati 21 > Konkan 18 > Kaveri 16 > Deccan 14; margin — Nilgiri > Sabarmati > Kaveri > Konkan > Deccan; growth — Konkan 38 > Sabarmati 17 > Kaveri 15 > Nilgiri 13 > Deccan 9; leverage — Deccan worst, Kaveri second-worst. Kaveri is fourth on returns, third on margin, mid on growth, weak on leverage and has the receivables issue: a P/E of ~26x vs a 35x median is a discount its fundamentals justify.

Stretch

E04.27 Average capital ≈ closing/1.15 (halfway between opening = closing/1.3 and closing); ROCE on average ≈ 22% × 1.15 ≈ 25%. Closing-capital ROCE understates returns for fast growers (capital arrived late in the year and has not yet earned); the reverse bias applies when capital shrinks.

E04.28 ROE = ROA + (ROA − 6) × D/E. A: 18 = ROA + (ROA − 6) × 0.1 → 1.1 ROA = 18.6 → ROA 16.9%. B: 18 = ROA + (ROA − 6) × 2 → 3 ROA = 30 → ROA 10%. ROA −4 pp: A → 12.9 + 6.9 × 0.1 = 13.6%; B → 6 + 0 × 2 = 6.0%. B's ROE is a leverage artefact and collapses when ROA falls.

E04.29 Model: "Kaveri's ROE moved with its net margin alone; asset turnover has been ~1.2 since FY22 and leverage ~1.6, so the company is not becoming more or less capital-efficient. Research time belongs on the margin drivers — solar mix, tender pricing, copper pass-through, Hosur utilisation — and on the receivables that make the margin's cash value doubtful, not on the plant or the balance sheet."

E04.30 A company whose sales grow 25% a year with margins expanding 1 pp a year but with receivable days rising 20 days a year and capex at 8% of sales: EBITDA margin rises; ΔNWC and capex grow faster than EBITDA; CFO/EBITDA falls and FCF turns more negative each year. The mechanism: profit is recognised on sales that are financed by the company and by its shareholders.

Real-world task

E04.31–32 Rubric: dashboard with all rows over five years and consistent definitions; a ten-line narrative that identifies the driver of returns (margin vs turnover vs leverage), the working-capital trend, the leverage trajectory and the earnings-quality read; incremental ROIC over three years; one concrete concall question.