Case 017Restructuring and recoveriesCore

Rushali Ceramics can be liquidated or sold as a going concern at 5x EBITDA of Rs 60 crore. Liquidation would realise 80% of Rs 120 crore of receivables, 50% of Rs 90 crore of inventory and 30% of Rs 250 crore of plant. Debt is Rs 350 crore. Which route gives creditors more?

The situation

Rushali Ceramics makes floor and wall tiles. It has defaulted on Rs 350 crore of secured bank debt. It still earns EBITDA of Rs 60 crore a year, but cannot service its interest. The lenders have two routes.

They can sell the business as a going concern to a rival, who has indicated 5.0x EBITDA. Or they can shut the plant and sell the assets: receivables of Rs 120 crore would collect about 80%, inventory of Rs 90 crore would sell at about 50%, and plant of Rs 250 crore, specialised kilns and presses, would fetch about 30% of book value.

Your task

Compare what creditors recover under each route, test how robust the answer is, and say which you would back.

Quick check

Which asset loses the most value in a liquidation?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The going concern sale gives creditors Rs 300 crore, 85.7% of their Rs 350 crore, against Rs 216 crore, 61.7%, in liquidation. Receivables realise Rs 96 crore, inventory Rs 45 crore and plant only Rs 75 crore. The business is worth more running because its plant is worth little to anyone else. The answer holds as long as the buyer pays more than 3.6x, or EBITDA stays above Rs 43 crore.

Step 1What is the business worth broken up?

Add up what each asset fetches in a forced sale. Receivables collect Rs 96 crore, inventory sells for Rs 45 crore and the plant fetches Rs 75 crore, Rs 216 crore in all, against Rs 460 crore of book value. The plant does the damage. A tile kiln is worth a lot inside a tile company and very little on a scrap dealer's truck, the same way a restaurant's custom kitchen sells for a fraction of what it cost.

Step 2What is it worth running?

A buyer pays for the earnings the assets produce together, not for the assets one by one. At 5.0x EBITDA of Rs 60 crore, the going concern valueWhat a business is worth sold as a working whole, usually valued on its earnings, rather than as separate assets. is Rs 300 crore, Rs 84 crore more than the break-up. Creditors recover 85.7% instead of 61.7%.

Against Rs 350 crore of debt, liquidation realises Rs 216 crore, a 61.7% recovery driven down by plant that fetches only 30% of book, while a going concern sale at 5.0x EBITDA of Rs 60 crore realises Rs 300 crore, an 85.7% recovery.

The relationship

\underbrace{0.8(120) + 0.5(90) + 0.3(250)}_{\text{liquidation}\;=\;216} \quad < \quad \underbrace{5.0 \times 60}_{\text{going concern}\;=\;300}

0.8, 0.5, 0.3	the share of book value each asset fetches in a forced sale
5.0	the multiple of EBITDA the buyer has indicated
60	EBITDA, Rs crore

What it says in wordsKeep the business running when its earnings are worth more than its parts sold one by one.

Step 3How robust is the going concern answer?

Find where it flips. The going concern route wins as long as the buyer pays more than 3.6x EBITDA, or EBITDA holds above Rs 43 crore at 5.0x, so there is real room. Time matters too. A sale that takes 18 months, discounted at 12%, is worth about Rs 253 crore today, still ahead of liquidation, though a business in limbo tends to lose customers and staff, so EBITDA of Rs 60 crore should be tested for what it will be at the point of sale, not today.

Rs crore	Book value	Liquidation	Share realised
Receivables	120	96	80%
Inventory	90	45	50%
Plant	250	75	30%
Total	460	216	47%

Liquidation realises Rs 216 crore from Rs 460 crore of book value, 47%, because the plant, more than half of book value, fetches only 30%.

Step 4Which would you back, and what would you check?

Back the going concern sale and protect it. Keep the plant running during the sale with a small amount of new money if needed, because every month of idle kilns moves the business towards its liquidation value. Check three things: that the Rs 60 crore of EBITDA survives the loss of the current owner, that the buyer's 5.0x is firm and funded, and whether any creditors rank ahead of the banks, such as unpaid wages or taxes, which come out of either pot before lenders see a rupee.

Where candidates lose it

The common miss is adding up book values, Rs 460 crore, and concluding creditors are fully covered. A forced sale of specialised plant realises a fraction of book, and that is where the answer is decided.

The second is treating the going concern value as fixed. Earnings of a distressed business decay during a long process, so speed is part of the recovery.

What the interviewer asks next

The buyer's offer drops to 4.0x. What now?
Unpaid wages and taxes of Rs 30 crore rank ahead of the banks. How do recoveries change?
How would you fund the business through a six-month sale process?

Company names and figures are illustrative.