Mock 2 — Analysis & business quality¶
Take after: Modules 04 and 05. Time: 2 hours, closed book (calculator allowed). Marks: 80 — Part A 25, Part B 30, Part C 25. Pass: 56 (70%).
Rules: show workings in Parts B and C. Amounts in ₹ crore unless stated. Use the Kaveri running example figures given in the questions; do not look them up. Mark with the answer key.
Part A — multiple choice (25 × 1 mark; ~30 minutes)¶
A1. Revenue grows 15%, EBITDA margin is flat, and depreciation grows 40% after a new plant. EBIT grows: (a) faster than revenue · (b) at 15% · (c) slower than revenue · (d) cannot be less than EBITDA growth
A2. A company's gross margin falls from 36.8% to 34.9% while its EBITDA margin falls from 15.4% to 13.8%. The most likely main cause is: (a) higher employee costs · (b) higher raw-material costs or a lower-margin mix · (c) higher depreciation · (d) higher interest
A3. ROCE differs from ROE mainly because: (a) ROCE uses PAT · (b) ROCE measures returns on all capital (debt and equity) before financing · (c) ROE ignores leverage · (d) ROCE includes goodwill only
A4. In the three-factor DuPont identity, ROE equals: (a) net margin × asset turnover × equity multiplier · (b) EBIT margin × asset turnover · (c) net margin ÷ leverage · (d) asset turnover × interest cover
A5. A company with a 30% ROIC that can reinvest 60% of its NOPAT grows NOPAT at about: (a) 6% · (b) 18% · (c) 30% · (d) 50%
A6. Negative working capital means: (a) the company is insolvent · (b) customers or suppliers are financing part of the operations · (c) inventory is negative · (d) the company has more debt than equity
A7. An increase in receivable days from 70 to 96 on revenue of ₹1,318 Cr ties up roughly: (a) ₹25 Cr · (b) ₹94 Cr · (c) ₹150 Cr · (d) ₹350 Cr
A8. Interest cover is usually defined as: (a) EBIT ÷ finance costs · (b) PAT ÷ interest · (c) debt ÷ EBITDA · (d) CFO ÷ debt
A9. Net debt ÷ EBITDA of 0.8× for an industrial company is generally: (a) alarming · (b) conservative · (c) impossible · (d) irrelevant
A10. CFO persistently below PAT is most worrying when: (a) the company is in a capex cycle · (b) receivables are growing faster than revenue · (c) depreciation is high · (d) the company pays dividends
A11. Diluted EPS growth is lower than net-profit growth when: (a) the company buys back shares · (b) the share count rises (options, conversions, equity raises) · (c) the tax rate falls · (d) the company pays dividends
A12. A business with high fixed costs and low variable costs has: (a) low operating leverage · (b) high operating leverage · (c) no pricing power · (d) negative gross margins
A13. Which is the clearest evidence of pricing power? (a) rising market share · (b) raising prices above cost inflation without losing volume · (c) high advertising spend · (d) a well-known founder
A14. Porter's "threat of substitutes" refers to: (a) new competitors entering the same industry · (b) products from other industries that meet the same need · (c) suppliers integrating forward · (d) customers switching brands
A15. The capital cycle predicts that high industry returns tend to: (a) persist indefinitely · (b) attract capacity, which later depresses returns · (c) fall because of regulation only · (d) rise as more capital enters
A16. Switching costs are a moat when: (a) customers find it expensive or risky to change supplier · (b) the company has high fixed costs · (c) the product is a commodity · (d) the founder owns most of the shares
A17. Network effects mean: (a) the product becomes more valuable as more people use it · (b) the company has many branches · (c) distribution is outsourced · (d) marketing spend is high
A18. Which is a governance red flag in an Indian company? (a) an independent audit committee · (b) a growing share of purchases from a promoter-owned supplier · (c) a dividend policy · (d) a Big Four auditor
A19. A promoter pledge is a risk to minority shareholders mainly because: (a) it increases dividends · (b) a price fall can trigger forced selling and a change of control · (c) it reduces the share count · (d) it is illegal
A20. "Say-do" analysis compares: (a) the sell-side's estimates with actuals · (b) management's past guidance and promises with what was delivered · (c) the company's price with its value · (d) the board's size with its independence
A21. Scuttlebutt research means: (a) reading only the annual report · (b) gathering information from customers, suppliers, competitors and ex-employees · (c) following social media · (d) screening on ratios
A22. A company earning a 12% ROIC while reinvesting heavily, with a 12% cost of capital: (a) creates value by growing · (b) neither creates nor destroys value by growing · (c) destroys value by growing · (d) must raise debt
A23. Unit economics for a subscription business most directly compare: (a) revenue and market cap · (b) customer lifetime value and customer acquisition cost · (c) EBITDA and capex · (d) price and volume
A24. Which statement about margins across industries is correct? (a) high margins always mean a better business · (b) a low-margin, high-turnover business can earn a high ROCE · (c) retailers have higher margins than software companies · (d) margins do not affect ROCE
A25. Management's capital allocation is best judged by: (a) the size of the capex budget · (b) the returns earned on capital retained and deployed over time · (c) the number of acquisitions · (d) the CEO's statements about priorities
Part B — ratio problems (30 marks; ~45 minutes)¶
B1. DuPont (6 marks). Kaveri FY26: PAT ₹90.5 Cr; revenue ₹1,318 Cr; total assets ₹1,035.8 Cr (FY25) and ₹1,143.6 Cr (FY26); equity ₹637.2 Cr (FY25) and ₹706.1 Cr (FY26); PBT ₹121.0 Cr; EBIT ₹134.1 Cr plus other income ₹3.9 Cr. Using average balances, compute the three-factor DuPont (net margin, asset turnover, equity multiplier) and ROE; then the tax burden, interest burden and EBIT margin (on EBIT including other income) of the five-factor version.
B2. Incremental returns (8 marks). Kaveri's NOPAT (EBIT × (1 − 25.17%)) was ₹91.37 Cr in FY24 and ₹100.35 Cr in FY26. Invested capital (net fixed assets, CWIP, right-of-use and intangibles plus net working capital) was ₹690.6 Cr at the end of FY24 and ₹886.8 Cr at the end of FY26; net working capital was ₹193.7 Cr and ₹365.0 Cr. (a) Compute the incremental ROIC over FY24–FY26. (b) What share of the increase in invested capital was working capital? (c) Compare with Kaveri's FY26 ROIC of 12.0% and interpret.
B3. Price, volume and mix (6 marks). A company sells two products. Year 1: A 100 units at ₹10, B 50 units at ₹20. Year 2: A 90 units at ₹11, B 70 units at ₹19. Compute revenue growth and split the change into volume (at year-1 average price), mix (at year-1 prices) and price effects.
B4. Operating leverage (4 marks). Revenue ₹500 Cr, variable costs 55% of revenue, fixed costs ₹150 Cr. Compute EBIT now and after a 10% revenue rise, and the degree of operating leverage. What happens to EBIT if revenue instead falls 10%?
B5. Earnings quality (6 marks). Kaveri FY26: PAT ₹90.5 Cr, CFO ₹65.1 Cr, capex ₹48.0 Cr, intangibles purchased ₹4.0 Cr, average total assets ₹1,089.7 Cr, net debt ₹140.5 Cr, EBITDA ₹181.9 Cr, EBIT ₹134.1 Cr, finance costs ₹17.0 Cr. Compute the balance-sheet accruals ratio ((PAT − CFO) ÷ average total assets), free cash flow and FCF ÷ PAT, net debt ÷ EBITDA and interest cover. Which one number worries you most, and why?
Part C — business-quality mini-case (25 marks; ~45 minutes)¶
Sahyadri Specialty Chemicals Ltd (fictional) makes intermediates for agrochemical and pharmaceutical companies under multi-year contracts, from two plants in Maharashtra. It listed in FY20.
| ₹ Cr | FY22 | FY23 | FY24 | FY25 | FY26 |
|---|---|---|---|---|---|
| Revenue | 820 | 1,010 | 1,190 | 1,260 | 1,410 |
| EBITDA margin | 24% | 25% | 23% | 19% | 18% |
| Capex | 180 | 260 | 320 | 280 | 150 |
| Cash from operations | 150 | 170 | 160 | 190 | 240 |
| Net debt | 120 | 290 | 520 | 640 | 610 |
| ROCE | 26% | 24% | 18% | 13% | 12% |
Other facts: the top three customers are 58% of revenue (the largest, a global agrochemical company, 31%); the plant commissioned in FY24 runs at 45% utilisation; management attributes the margin decline to "Chinese price competition and customer destocking" and guides to "margins recovering to 22–24% as utilisation improves"; the promoter family owns 62% with no pledge; the second plant's land is leased from a promoter-group company; the company has filed 14 process patents; two contracts are "take-or-pay" for three years.
Required:
- (5 marks) Compute EBITDA for each year, free cash flow (CFO − capex) for each year and in total, CFO ÷ EBITDA each year, and net debt ÷ EBITDA each year. Compare the revenue and EBITDA CAGRs for FY22–FY26.
- (5 marks) Compute the increase in EBITDA over FY22–FY26 per rupee of cumulative capex. What does it say about the returns on the expansion?
- (6 marks) Assess the moat: list the sources of competitive advantage the facts support, and the threats (customer concentration, China, the capital cycle). Use 05.3 and 05.4.
- (5 marks) Evaluate management's capital allocation and governance, and write two questions for the next earnings call that would test the "margins recovering" guidance.
- (4 marks) Give an overall business-quality verdict (High / Medium / Low) with the three facts that decide it.