Answer key — Mock 2 (Analysis & business quality)¶
Part A (1 mark each)¶
| Q | Answer | Why |
|---|---|---|
| A1 | c | Depreciation growing faster than EBITDA compresses EBIT growth |
| A2 | b | Most of the EBITDA-margin fall is at the gross-margin line |
| A3 | b | ROCE is pre-financing and on all capital |
| A4 | a | Net margin × asset turnover × equity multiplier |
| A5 | b | g = ROIC × reinvestment rate = 30% × 60% |
| A6 | b | Payables/advances exceed receivables and inventory |
| A7 | b | 1,318 × 26 ÷ 365 ≈ ₹94 Cr |
| A8 | a | EBIT ÷ finance costs |
| A9 | b | Well within typical comfort levels for industrials |
| A10 | b | Growth in receivables ahead of revenue is the classic earnings-quality flag |
| A11 | b | More shares dilute EPS growth |
| A12 | b | Small revenue changes produce large profit changes |
| A13 | b | Pricing ahead of costs without volume loss |
| A14 | b | Substitutes come from outside the industry |
| A15 | b | High returns attract capital and capacity |
| A16 | a | Cost or risk of changing supplier |
| A17 | a | Value rises with the number of users |
| A18 | b | A rising related-party share is a leakage channel |
| A19 | b | Margin calls can force sales and shift control |
| A20 | b | Promises vs delivery |
| A21 | b | Primary research with the business's counterparties |
| A22 | b | Growth at ROIC = WACC adds no value |
| A23 | b | LTV vs CAC |
| A24 | b | e.g. a supermarket: thin margin, high turnover, good ROCE |
| A25 | b | Returns on retained and deployed capital over time |
Part B¶
B1 (6). Average assets ₹1,089.7 Cr; average equity ₹671.65 Cr. Net margin 90.5 ÷ 1,318 = 6.87%; asset turnover 1,318 ÷ 1,089.7 = 1.21×; equity multiplier 1,089.7 ÷ 671.65 = 1.62×; ROE = 6.87% × 1.21 × 1.62 = 13.5% (matches the reference 13.5%) (3). Five-factor: tax burden 90.5 ÷ 121.0 = 0.748; interest burden 121.0 ÷ 138.0 = 0.877; EBIT margin 138.0 ÷ 1,318 = 10.5% (3).
B2 (8). (a) Incremental ROIC = (100.35 − 91.37) ÷ (886.8 − 690.6) = 8.98 ÷ 196.2 = 4.6% (3). (b) Working capital rose from ₹193.7 Cr to ₹365.0 Cr: ₹171.3 Cr, 87% of the increase in invested capital (2). (c) The average ROIC (12.0%) hides that new capital earned under 5% — well below a ~12% WACC. Almost all the new capital went into receivables and inventory (mostly the solar receivables from state agencies), so growth since FY24 has destroyed value unless those receivables are collected (04.3) (3).
B3 (6). Revenue ₹2,000 → ₹2,320: +16.0% (1). Year-1 average price = 2,000 ÷ 150 = ₹13.33. Volume effect: (160 − 150) × 13.33 = +₹133.3 (1.5). Mix effect: year-2 units at year-1 prices (90 × 10 + 70 × 20 = 2,300) − 160 × 13.33 = +₹166.7 (1.5). Price effect: 2,320 − 2,300 = +₹20 (1.5). Total 320 ✓ (0.5). Most of the growth was mix (towards the dearer product B), not price.
B4 (4). EBIT = 500 × 0.45 − 150 = ₹75 Cr; at ₹550 Cr revenue, 247.5 − 150 = ₹97.5 Cr (+30%) (2). DOL = 30% ÷ 10% = 3.0 (1). A 10% fall gives 202.5 − 150 = ₹52.5 Cr (−30%) (1).
B5 (6). Accruals ratio (90.5 − 65.1) ÷ 1,089.7 = 2.3% (1). FCF = 65.1 − 48.0 − 4.0 = ₹13.1 Cr; FCF ÷ PAT = 14.5% (2). Net debt ÷ EBITDA = 140.5 ÷ 181.9 = 0.77×; interest cover 134.1 ÷ 17.0 = 7.9× (2). The worrying number is FCF ÷ PAT of 14.5%: the balance sheet is comfortable, but the company converts less than a sixth of its profit into free cash — the profit is going into working capital (1).
Part C (25 marks)¶
1 (5). EBITDA: 196.8, 252.5, 273.7, 239.4, 253.8. FCF: −30, −90, −160, −90, +90; total −280. CFO ÷ EBITDA: 76%, 67%, 58%, 79%, 95%. Net debt ÷ EBITDA: 0.61×, 1.15×, 1.90×, 2.67×, 2.40×. Revenue CAGR 14.5%; EBITDA CAGR 6.6% — growth bought with margin.
2 (5). EBITDA rose ₹57.0 Cr (196.8 → 253.8) on cumulative capex of ₹1,190 Cr: about ₹0.05 of EBITDA per rupee of capex, i.e. a pre-tax return near 5% on the expansion so far. Some of that is under-utilisation (45%) and may improve, but the expansion has so far earned far below the cost of capital while net debt rose fivefold.
3 (6). Supported sources of advantage: process know-how and patents (14 filings); multi-year contracts and two take-or-pay agreements; customer qualification (switching costs are real in regulated agro and pharma supply chains). Threats: concentration (top three 58%, one customer 31%) gives customers bargaining power; Chinese competition is compressing prices, suggesting the product is closer to a commodity than the contracts imply; the industry-wide capacity build (the capital cycle) plus Sahyadri's own 45%-utilised plant means price discipline is weak. On balance: a narrow, contract-based advantage, not a wide moat.
4 (5). Capital allocation: aggressive, debt-funded expansion at the top of the cycle, with returns falling from 26% to 12% ROCE; capex has since been cut (FY26 ₹150 Cr) — a sensible response. Governance: no pledge is a positive; the promoter-group land lease is a related-party transaction to monitor (terms, escalation). Questions: (i) "What price and utilisation assumptions give 22–24% margins, and what utilisation did the new plant reach in the latest quarter?" (ii) "What share of FY27 revenue is under take-or-pay or fixed-price contracts, and when do the largest customer's contracts come up for renewal?"
5 (4). Medium–Low. Deciding facts: (1) returns on the expansion (~5% on ₹1,190 Cr of capex) and ROCE falling to 12%; (2) customer concentration with a 31% customer; (3) margins falling with rising competition, while leverage peaked at 2.7× EBITDA. A recovery in utilisation could lift it to Medium; nothing in the data supports High.
Scoring: 56+ (70%) move on; 45–55 redo the Module 04 lessons behind your misses; below 45 revisit Modules 04 and 05.