Module 07 · Exercises

Warm-up

E07.01 Why do EV/EBITDA and FCFF-based DCF fail for a bank? Name the replacements for revenue, EBITDA, FCF, EV and WACC.

E07.02 Define: NIM, cost-to-income, credit cost, GNPA/NNPA, PCR, slippages, CRAR, ALM, stage 1/2/3.

E07.03 Define: embedded value, VNB, VNB margin, persistency, combined ratio, float, TER, take rate.

E07.04 State the P/E paradox for cyclicals and the two multiples that replace P/E at a trough.

E07.05 Define contribution margin, Rule of 40, implied terminal multiple, holdco discount, NAV, regulated equity base, ARPU.

E07.06 What changes for Indian banks on 1-Apr-2027, and what is the transition period?

Core

E07.07 Nirmal RoA tree. Using FY26 figures (interest income 1,073.2; interest expense 442.1; fees 50.8; opex 241.3; credit cost 120.6; tax 80.5; average assets 6,831.4; average equity 1,590.55), build the tree in % of average assets and derive RoE.

E07.08 Asset-quality roll-forward. Stage 3 opened FY26 at ₹150.3 Cr and closed at ₹200.7 Cr; write-offs were ₹84.6 Cr. Estimate gross slippages (ignore recoveries) and express them as % of average loans (6,350).

E07.09 Capital. Nirmal's CRAR is 27.6% with RWA ₹6,642 Cr. If loans grow 20% a year and RWA density holds, with PAT growing 15% and a 12.5% payout, estimate CRAR after three years (Tier-2 constant at ₹140 Cr). When would a 15% floor bind?

E07.10 Justified P/B. Compute Nirmal's justified P/B at RoE 15.1%, \(k_e\) 13%, g 6%, 7% and 8%; and the implied RoE at ₹402 (book ₹154.1/share) with g 8%.

E07.11 Residual income. Value Nirmal with RoE 15.5%, 15.5%, 15%, 15%, 15% for five years (book growing 13%, 13%, 12%, 12%, 11%), then RoE 14% and g 6% for ever, \(k_e\) 13%; report value per share (11 Cr shares) and P/B.

E07.12 Stress. Recompute Nirmal's FY26 PAT and RoE at a credit cost of 4.5% of average loans and a cost of funds 100 bps higher (average borrowings ≈ 5,082).

E07.13 Life insurer. EV ₹15,000 Cr; VNB ₹1,050 Cr; \(k_e\) 12%; VNB growth 15% for five years then 5% terminal. Compute the structural value, appraisal value and justified P/EV.

E07.14 AMC. AUM ₹2,50,000 Cr, 60% equity at 55 bp net yield, 40% debt/liquid at 10 bp; costs ₹550 Cr. Compute operating profit and its change if the equity yield is cut 8 bp.

E07.15 Exchange stress. An exchange earns ₹3,000 Cr from index options, ₹800 Cr from cash equities and ₹700 Cr from data/listing/other, with fixed costs ₹1,200 Cr. Compute EBIT; then EBIT if index-option revenue falls 40% after a regulatory change.

E07.16 Cyclical normalisation. Narmada Steel: 6.5 MT volumes; ten-year EBITDA/tonne of 3,200, 4,500, 6,800, 9,500, 12,500, 15,000, 7,000, 4,200, 5,500, 8,000 ₹/t; D&A ₹1,800 Cr; interest ₹900 Cr; tax 25%; market cap ₹30,000 Cr; net debt ₹12,000 Cr; capacity 7 MT. Compute normalised EBITDA (mean and median), normalised PAT and P/E, EV/tonne, and the EBITDA sensitivity to ₹1,000/t with 15% cost linkage.

E07.17 Cost curve. Producers' cash costs: A ₹30k/t (2 MT), B ₹34k (3 MT), C ₹38k (3 MT), D ₹44k (2 MT), E ₹48k (2 MT). Demand is 9 MT. Which producer is marginal, what price clears the market (at marginal cash cost), and what is A's cash margin? Repeat for demand of 11 MT.

E07.18 Loss-maker path. Dhruv Delivery: base revenue ₹2,160 Cr; orders 26.67 Cr; contribution per order −₹5 → +₹3, +₹10, +₹16, +₹22 over five years; order growth 40/32/25/20/15%; fixed costs ₹900 Cr growing 8% from year 2. Compute EBITDA each year, the break-even year and cumulative burn to the trough.

E07.19 Implied terminal multiple. Dhruv trades at 6x revenue (EV ₹12,960 Cr). If year-8 revenue is ₹9,165 Cr at a 12% margin and the discount rate is 14%, compute the implied EV/EBITDA on year-8 EBITDA, nominal and in present-value terms.

E07.20 Dilution. A loss-maker issues 3% new shares a year for four years via ESOPs and a ₹1,000 Cr round at ₹250/share on a 20 Cr share base in year 2. Compute the cumulative dilution factor for an existing shareholder.

E07.21 Holdco SOTP. Deccan Investments: stakes of 35% in A (mcap ₹18,000 Cr), 22% in B (₹9,000 Cr), 100% of an unlisted NBFC (₹1,200 Cr); 5 Cr shares; stock ₹950. Compute gross NAV/share and the discount; then build a discount from causes (tax 10%, dividend leakage 15%, costs 1%, control 20%, liquidity 5%, optionality −5%).

E07.22 MNC royalty. A subsidiary pays 4.5% royalty on ₹5,000 Cr sales with PAT ₹600 Cr. Compute the royalty as % of pre-royalty PBT (assume the royalty is fully deductible, tax 25%), the annual PAT leak vs a 2% "fair" royalty, and its capitalised value at 30x.

E07.23 Real-estate NAV. Projects: A sales ₹1,200 Cr, cost 65%, 3 years; B ₹800 Cr, 55%, 4 years; C ₹2,000 Cr, 40%, 5 years (cash flows at mid-point, \(k_e\) 14%); land bank ₹600 Cr; rental NOI ₹150 Cr at an 8% cap rate; net debt ₹900 Cr; 20 Cr shares. Compute NAV per share; then with a 9% cap rate and C's sales −20%.

E07.24 Regulated utility. Regulated equity ₹4,000 Cr at an allowed RoE of 15.5%; \(k_e\) 11%; equity base growing 6% through capex. Compute regulated PAT, justified P/B and equity value; then the value if the regulator cuts the allowed RoE to 14%.

E07.25 Telecom. An operator has 300 mn subscribers, ARPU ₹210, EBITDA margin 50%, capex ₹35,000 Cr, net debt incl. spectrum ₹1,60,000 Cr, and trades at an EV of ₹4,00,000 Cr. Compute revenue, EBITDA, EV/EBITDA, FCF before interest, and the EBITDA change from a 15% tariff hike with 90% flow-through.

Stretch

E07.26 Explain why residual income and DCF give the same value under clean-surplus accounting, and construct a small example where they diverge because of an inconsistent terminal assumption.

E07.27 Argue for and against valuing a PSU bank on the same P/B–RoE line as private banks.

E07.28 A quick-commerce platform reports "adjusted EBITDA break-even" while ESOP cost is 6% of revenue and dark-store leases are capitalised. Restate profitability on three bases and say which you would use.

E07.29 Using the Merton lens, describe how Vodafone Idea's equity value would respond to (a) a 15% tariff hike, (b) a government equity conversion at a discount, (c) an AGR relief judgment.

Real-world task

E07.30 Choose a listed Indian NBFC. From its latest annual report and investor presentation, build the RoA tree, the stage-3 roll-forward, CRAR headroom vs growth, and the P/B–RoE position vs three peers; compute implied RoE at the current price.

E07.31 Choose a listed cement or steel company. Compute EV/tonne, ten-year EBITDA/tonne, normalised earnings and the current cycle position; state what phase the price assumes.

E07.32 Choose a listed loss-making platform. Rebuild contribution margin from the P&L, compute cumulative burn and runway, and translate EV/Sales into an implied terminal multiple with your own terminal margin.