Value a construction company and decide whether to lend to it: a Rs 9,000 crore order book and Rs 330 crore of EBITDA, but only Rs 420 crore of operating cash flow over five years against Rs 1,500 crore of cumulative EBITDA. It asks for a Rs 300 crore facility.

On reported EBITDA Kethara looks worth about Rs 1,980 crore, but only 28% of its profit has turned into cash, and I would not lend the Rs 300 crore as asked. Over five years Rs 1,010 crore went into unbilled work, receivables and retention money. Valued on the cash it converts, the business is worth nearer Rs 554 crore, less than its Rs 900 crore of debt. I would offer a smaller facility secured on certified receivables instead.

Contractors book revenue as work progresses, but get paid only when the client certifies the work, and then keep back a retention until the project is finished. Profit is recognised when the road is built; cash arrives when the government pays, and in between it sits on Kethara's balance sheet as unbilled work, receivables and retention money. A tailor who finishes a suit but is paid only when the customer collects it, less a deposit held until alterations are done, has profits on paper and an empty till. For Kethara the build-up has been Rs 1,010 crore in five years.

At 6x EBITDA of Rs 330 crore, Rs 1,980 crore, leaving about Rs 1,080 crore for equity after debt. But that multiple assumes EBITDA is cash. Value only the 28% that converts, about Rs 92 crore a year, at the same multiple and the business is worth about Rs 554 crore, less than its debt. The truth lies between, and it depends on one question: how much of the Rs 1,010 crore of unbilled work, receivables and retention will ever be collected. Unbilled work that no engineer has certified is the least certain of the three, and the largest.

Not as a general facility. Debt would reach Rs 1,200 crore, 3.6x EBITDA, with interest of about Rs 120 crore against operating cash flow that has averaged Rs 84 crore a year before capex. The company has been borrowing to fund its own receivables, and a new loan would mostly fund more of the same. After capex of Rs 60 crore a year, five years of free cash flow total only Rs 120 crore.

What I would offer instead is a working capital line against certified bills only: say 75% of Rs 240 crore of certified receivables from government clients under 90 days old, about Rs 180 crore, with collections paid into an account the lender controls. That lends against cash that is due, not against profit that has not been billed. Add a covenant on operating cash flow as a share of EBITDA, tested over two years. The limitation: government receivables are usually collected in the end, so the risk is timing and disputes rather than outright loss, which is why the answer is a structured loan rather than a flat refusal.