Module 05 · Solutions

Warm-up

E05.01 (a) Nirmal: see 05.1 check question 1. (b) IT major: it sells engineers' time and outcomes to US/European corporates delivered from India; clients buy for cost, scale and reliability; it bills monthly on T&M or fixed-price contracts, pays salaries, keeps 20–25% and returns most of it. (c) CDSL: it holds investors' securities in electronic form and charges issuers annual fees and investors/brokers per-account and per-transaction fees; participants use it because a depository is mandatory and the duopoly is licensed; revenue is small fixed fees on a very large account base with mostly fixed costs.

E05.02 Toll road: concession/project (contracted or traffic-based); exchange: platform/take rate; out-licensed drug: licensing/royalty; QSR franchisee: product/service with store units; EPC: project; SaaS: recurring subscription; jewellery retailer: product sale (with making charges as the margin and gold as pass-through).

E05.03 Rivalry, entrants, buyer power, supplier power, substitutes; plus the state (as buyer, price-setter, licensor, competitor).

E05.04 Scale economies (UltraTech logistics), network economies (NSE, CDSL, IEX, Naukri), counter-positioning (IndiGo, Zerodha, Jio), switching costs (core-banking software, CDMO validations), branding (Asian Paints, Fevicol, Tanishq), cornered resource (Coal India mines, patents, airport concessions), process power (HDFC Bank underwriting, Asian Paints supply chain, Bajaj Finance cross-sell).

E05.05 Capital cycle: high returns → capacity → returns fall → capacity exits → returns recover. Incremental ROIC: ΔNOPAT ÷ Δinvested capital. Say-do ratio: guidance delivered ÷ guidance given. RPT: a transaction with promoters, directors, KMP, their relatives, subsidiaries/associates or entities they control. UPSI: unpublished price-sensitive information as defined by SEBI's PIT Regulations.

E05.06 Since 18-Nov-2025 (LODR Fifth Amendment, 2025): consolidated turnover ≤ ₹20,000 Cr → 10% of turnover; ₹20,000–40,000 Cr → ₹2,000 Cr + 5% above ₹20,000 Cr; > ₹40,000 Cr → ₹3,000 Cr + 2.5% of the excess, capped at ₹5,000 Cr. Before: lower of ₹1,000 Cr or 10% of consolidated turnover.

E05.07 That the terms match those with unrelated parties; the audit committee approved it and the auditor tests disclosure, not economic fairness — nobody outside has verified the pricing.

Core

E05.08 Contribution per order = 1,500 × 0.60 − 220 = ₹680. LTV = 2.0×680/1.15^0.5 + 1.0×680/1.15^1.5 + 0.6×680/1.15^2.5 = 1,268.2 + 551.4 + 287.6 = ₹2,107. LTV/CAC = 1.92x — below the 3x comfort line. Payback = 1,100/(2.0 × 680/12) = 9.7 months.

E05.09 Variable = 0.29 × 280 + 0.07 × 280 + 7 = 107.8; contribution = 172.2 (61.5%). Fixed = 62 + 40 + 7 + 20 = 129; store EBIT = ₹43.2 lakh (15.4%). Capital = 185; ROIC = 43.2 × 0.75/185 = 17.5%; payback = 185/(43.2 + 20) = 2.9 years.

E05.10 NII = 150 − 0.78 × 1,000 × 0.09 = 150 − 70.2 = 79.8; + fees 6 − opex 30 = 55.8; − credit cost 15 = PBT 40.8; PAT = 40.8 × 0.7483 = ₹30.5 → RoA 3.05%; RoE on ₹220 equity = 13.9%. Credit cost 3.0%: PBT 25.8; PAT 19.3; RoE 8.8%.

E05.11 HHI = 38² + 25² + 15² + 10² + 7² + 5² = 1,444 + 625 + 225 + 100 + 49 + 25 = 2,468 (moderately-to-highly concentrated; just under 2,500). Merger of the top two: 63² + 225 + 100 + 49 + 25 = 3,969 + 399 = 4,368 — highly concentrated; would face CCI scrutiny.

E05.12 Buyer power: receivable days 96 and > 6-month overdues ₹62.4 Cr (state agencies); rivalry: tender-driven gross margin ~22–24% vs ~40% in agri; supplier power: solar panels bought in (gross margin dilution) and copper pass-through lag; entrants: Konkan Solar's 38% growth in the peer set (low barriers); substitutes: solar vs grid/diesel pumps — the segment is the substitute; the state: PM-KUSUM tenders and BG requirements (₹96 Cr).

E05.13 14 crore × 30% = 4.2 crore pumps installed; replacement 10% a year = 42 lakh pumps × ₹9,000 = ₹3,780 Cr of annual replacement demand — a small fraction of the ₹60,000 Cr claim, which presumably includes industrial, building, solar systems, new installations and unorganised sales at retail prices. The bottom-up number is the one to grow from; the TAM slide is marketing.

E05.14 Return persistence: fails (ROIC below WACC in FY21, at WACC in FY26; above by > 5 pp never). Share: unknown (not disclosed). Pricing power: partial (gross margin swung 3 pp with copper and mix; lagged pass-through). Gross-margin gap: none vs peers. Reinvestment economics: fails (incremental ROIC 4.6%). Verdict: a modest dealer/brand advantage in agri pumps and none in solar; not a moated company.

E05.15 The value-driver terminal assumes new capital earns RONIC 18% > WACC 12.2%; a no-moat verdict argues RONIC → WACC over time. From 06.3 §8, RONIC = WACC cuts the base value from ₹320 to ~₹280 (−₹40/share); a slow fade to ~15% would cost roughly half that. The moat judgement is worth 5–12% of value.

E05.16 Prices fall as capacity commissions (module prices halve); margins compress, weakest entrants make losses; capex is deferred or cancelled; consolidation and exits; imports/policy (ALMM, duties) shape the floor; stocks de-rate before earnings fall and re-rate before capacity exits are complete. The turn: capex announcements stop and industry capex/D&A falls below 1, while utilisation rises.

E05.17 A: NOPAT ₹200 → ₹519 Cr on 10 Cr shares (₹51.9/share) with ₹1,594 Cr of dividends. B buys earnings at a 4% pre-tax yield (3% after tax) with capital costing 12% and shares issued at a 5% earnings yield; each deal destroys value and raises the share count by ~25% over the decade, so per-share NOPAT (and value) ends below A's although total NOPAT is higher. Growth bought below the cost of capital is dilution with a press release.

E05.18 May-2025: growth 15–18% (miss: 12.5%); margin 15%+ (miss: 13.8%); days 70–75 (miss: 96); capex ₹40–45 Cr (miss: ₹52 Cr); Nov-2025: dues clearing in Q4 (miss). May-2026: FY27 growth 15–18%, margin 14–15%, days 75–80 (Q1: +3.5%, 12.6%, undisclosed — early miss); dividend ~25% (delivered); no large capex (delivered so far). Say-do ratio ≈ 2/8 = 25%.

E05.19 Revenue-linked ESOPs encourage tender bidding at thin margins and extended credit to dealers/agencies; discourage walking away from bad states. RoA/GNPA-linked ESOPs encourage tighter underwriting and cost control; discourage growth into new segments — and can encourage under-provisioning to flatter RoA/GNPA (the metric can be gamed; check PCR).

E05.20 Model scoring (from 05.6 §7): holding 0; pledge 1; RPT 2; loans to group 0; royalty 0; board n/a; auditor 1; KMP 0; remuneration n/a; preferential issues 0; disclosure 1; regulatory 0; capital allocation 0; contingent liabilities 1 → 7. Consequence: raise the bear probability (25% → 35%) or WACC by 50–75 bps; monitor RPT and pledge quarterly.

E05.21 8% × 89.2 = ₹7.1 Cr EBITDA; PAT effect 7.1 × 0.7483 = ₹5.3 Cr; per share ₹0.89; at 20x → ₹18/share (~4–5% of the price) — material enough to ask, not enough to decide the case alone.

E05.22 Loan = 50% × 400 = ₹200 per pledged share. LTV 65% is breached when price < 200/0.65 = ₹308 (a 23% fall). Then: margin call → promoter tops up or lender sells → price falls further → more calls → forced selling and loss of control — the reflexive loop that makes pledged stocks gap.

E05.23 Allowed (process/culture, no UPSI): "How were loan applications assessed at the branch level — what could a branch approve without regional sign-off?" "How were collections organised when a borrower missed two EMIs?" "How did branch targets change between good and bad years?" "What made a customer choose you over a bank?" "How were dealer/DSA relationships managed and paid?" Must not ask: current quarter's disbursements/collections/ GNPA numbers; anything about unannounced fund-raising, RBI inspections or results.

E05.24 Tractor demand in MP: VAHAN registrations by state and month; FADA. State solar payments: state budget documents, PRAAPTI (for DISCOM dues), peers' concalls and rating rationales. Copper: LME forward curve and inventories; MCX. Rural demand: NIQ/company rural volume disclosures, VAHAN 2W, IMD monsoon, Agmarknet prices, MGNREGA demand data.

Stretch

E05.25 Rubric: size and growth with sources; structure (PNGRB-awarded geographical areas — local monopolies for an exclusivity period); five forces (regulator sets the game; buyers fragmented; suppliers = APM gas allocation and LNG); profit pool (CGD margins vs upstream vs transmission); regulation (APM allocation cuts 2024–25, excise on CNG); life-cycle stage (growth in new GAs, mature in metros); structural ROIC; what could change (EV adoption, allocation policy, open access).

E05.26 Rubric: bull case cites the dealer network, brand trust with farmers, service reach and stable agri margins (evidence: FY21–24 ROIC rise, agri gross margin stability); bear case cites ROIC at WACC, incremental ROIC 4.6%, tender-driven solar, no peer margin gap, rising RPT purchases; the fade chosen should be moderate in agri (narrow moat) and fast in solar (none), and the terminal RONIC below the reference's 18%.

E05.27 Rubric: e.g., (1) "State dues always get paid — receivables are timing, not credit" → evidence: ageing migration and actual collections in H1 FY27; (2) "Hosur ramp will restore margins to 15%+" → evidence: motors utilisation and segment margin in FY27; (3) "The market is right that 14% growth is sustainable — solar order book ₹410 Cr proves it" → evidence: order inflow in FY27 and the state mix. Each with a date.

Real-world task

E05.28–29 Rubric: every element present with sources; five forces each tied to a number; moat tests on ten years; say-do table with scores; governance checklist scored with page references; scuttlebutt plan with non-leading questions and a UPSI boundary statement; SEBI search results recorded (including "none found").