Answer key — Mock 3 (Valuation)¶
Part A (1 mark each)¶
| Q | Answer | Q | Answer | Q | Answer | Q | Answer |
|---|---|---|---|---|---|---|---|
| A1 | b | A6 | b | A11 | b | A16 | a |
| A2 | b | A7 | b | A12 | b | A17 | b |
| A3 | b | A8 | b | A13 | b | A18 | b |
| A4 | b | A9 | b | A14 | b | A19 | b |
| A5 | b | A10 | b | A15 | b | A20 | b |
Notes: A6 — ₹100 ÷ 10% = ₹1,000. A11 — 1 ÷ 25 = 4%. A17 — your probability-weighted value is below the price, so the market is pricing better outcomes than your scenarios; it is a reason to re-examine both, not proof either is wrong.
Part B¶
B1 (8). kₑ = 7.0% + 1.10 × 6.0% = 13.6% (2); after-tax k_d = 9.0% × 0.75 = 6.75% (2); WACC = 0.8 × 13.6% + 0.2 × 6.75% = 12.23% (2). More debt raises financial risk: beta (and so kₑ) rises and the cost of debt rises, offsetting the cheaper debt; beyond a point distress costs dominate (06.2) (2).
B2 (15). (a) PV of years 1–5 at 12% = ₹348.2 Cr; year-6 FCFF = 120.75; TV = 120.75 ÷ 0.07 = ₹1,725.0 Cr; PV of TV = 1,725 ÷ 1.12⁵ = ₹978.8 Cr; EV = ₹1,327.1 Cr; equity = ₹1,127.1 Cr; value per share = ₹112.7 (7). (b) TV share = 978.8 ÷ 1,327.1 = 73.8% (1). (c) Sensitivity (₹ per share) (5):
| WACC \ g | 4% | 5% | 6% |
|---|---|---|---|
| 11% | 117.2 | 135.2 | 160.4 |
| 12% | 99.7 | 112.7 | 130.1 |
| 13% | 86.1 | 95.8 | 108.4 |
(d) ₹120 needs WACC 11% with g of about 4% or more, or WACC 12% with g near 6% (2).
B3 (8). (a) Reinvestment rate = g ÷ RONIC = 5% ÷ 15% = 33.3%; FCF = 100 × (1 − 0.333) = ₹66.7 Cr; TV = 66.7 ÷ 0.06 = ₹1,111.1 Cr (4). (b) RONIC = WACC: TV = NOPAT ÷ WACC = 100 ÷ 0.11 = ₹909.1 Cr (growth adds nothing); naive: 100 ÷ 0.06 = ₹1,666.7 Cr (2). (c) The naive formula assumes growth needs no reinvestment — infinite RONIC — and so overstates value (06.3) (2).
B4 (12). (a) Median P/E = (33.1 + 36.2) ÷ 2 = 34.65× → 15.08 × 34.65 = ₹522.5. Median EV/EBITDA = (20.1 + 21.4) ÷ 2 = 20.75× → EV = 181.9 × 20.75 = ₹3,774 Cr − 140.5 − 18.2 = ₹3,616 Cr ÷ 6.07 = ₹595.7 (6). (b) Reasons for a discount: lower ROCE (16% vs a 19.5% peer median — only Deccan is lower); much weaker cash conversion (CFO ÷ EBITDA 36%, receivables at 96 days); slower growth than Sabarmati and Konkan, the two peers it most resembles in product mix. Credit also for governance points from the running example (the promoter pledge, the rising related-party share) (3). (c) The peer multiples assume Kaveri's earnings are as good as the peers'; the DCF values its actual cash flow, which is poor. Peer multiples are themselves high (29–40× P/E), so relative value can be "cheap" against an expensive group. Trust the DCF's discipline, use the peers as a check on the market's mood (06.5) (3).
B5 (12). (a) D₁ = 40% × 25 = ₹10; 500 = 10 ÷ (0.12 − g) → g = 10% (4). (b) g = RoE × retention → RoE = 10% ÷ 0.60 = 16.7% (3). (c) Payout = 1 − 8% ÷ 15% = 46.7%; justified forward P/E = 0.467 ÷ (0.12 − 0.08) = 11.7×, i.e. ₹292 on ₹25 EPS. The ₹500 price (20× forward) needs faster growth or a higher RoE than 15% — it is expensive unless the company can sustain RoE near 17% with 10% growth (5).
Part C (25)¶
- (6) P/B = (15.1% − 8%) ÷ (13% − 8%) = 1.42× → 1.42 × ₹154.1 = ≈ ₹219, 46% below ₹402.
- (5) Implied RoE = 8% + 2.61 × 5% = 21.0%.
- (6) Leverage: RoA 3.5% × leverage 6.0× = 21%; leverage from 4.4× to 6× means CRAR falling towards ~20% — possible for a well-capitalised NBFC, but it raises risk and may trigger rating scrutiny. RoA: at 4.4× leverage, RoE 21% needs RoA of 4.8%, against a six-year best of 3.7%. Credit cost falling from 1.9% back to its FY24 low of 1.3% adds only ~0.4 pp of RoA after tax; the rest would need cost-to-income far below 35.4% — better than anything in Nirmal's history, while GNPA is rising (2.5% → 2.9%). Leverage is the more plausible route; both require things to go right in a book that is currently deteriorating (07.1).
- (4) 2.4 = (RoE − 8%) ÷ 5% → RoE = 20%.
- (4) The price embeds a lender earning ~21% on equity indefinitely against today's 15% and a rising GNPA: expensive; a watch rather than a buy. Change of mind: two consecutive quarters of falling stage-3 loans with credit cost below 1.5%, or evidence that leverage can rise to 6× without a rating downgrade.
Scoring: 70+ move on; 55–69 revisit the lessons behind your misses; below 55 redo Modules 06–07.