Case 090Forecasting and modellingCore

Build bear, base and bull EBITDA for a diagnostics chain where test volumes grow 5%, 10% or 15%, 55% of costs are fixed and today's margin is 24%. Which scenario does the price reflect?

The situation

Juvenza Diagnostics runs pathology labs and collection centres. This year's revenue is Rs 1,200 crore at an EBITDA margin of 24%, so EBITDA is Rs 288 crore. Of its Rs 912 crore of costs, 55% are fixed (lab staff, rent, machines on lease) and 45% move with test volumes (reagents, collection, courier).

Prices per test are flat. Your scenarios for next year's volume growth are 5%, 10% and 15%. Juvenza's enterprise value is Rs 7,300 crore, and diagnostics companies trade near 18x next year's EBITDA.

Your task

Build the three EBITDA scenarios, then say which one the current enterprise value is paying for.

Quick check

In the base case, volumes grow 10%. How much does EBITDA grow?

Worked solution

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

30-second answerThe answer to give first

Bear, base and bull EBITDA are about Rs 327, 367 and 406 crore, and the price reflects the bull case. With 55% of costs fixed, each 5 points of volume adds about Rs 39 crore of EBITDA, so EBITDA grows 2.7 times as fast as volumes. At 18x, Rs 7,300 crore of enterprise value implies Rs 406 crore of EBITDA, almost exactly the 15% volume case. The price leaves no room for anything short of the best case.

Step 1How do you build each scenario?

Split costs first, because the split is what makes the scenarios differ. Fixed costs are Rs 501.6 crore whatever happens; variable costs are 34.2% of revenue. Each rupee of extra revenue keeps 65.8 paise as EBITDA, against a 24 paise average, which is operating leverage in one number. A tuition teacher who rents a room for the month earns almost the whole fee of every extra student, because the rent is already paid. Juvenza's labs are that rented room.

Rs croreTodayBear, +5%Base, +10%Bull, +15%
Revenue1,200.01,260.01,320.01,380.0
Variable costs, 34.2%(410.4)(430.9)(451.4)(472.0)
Fixed costs(501.6)(501.6)(501.6)(501.6)
EBITDA288.0327.5367.0406.4
EBITDA growth+13.7%+27.4%+41.1%
EBITDA margin24.0%26.0%27.8%29.5%
With Rs 501.6 crore of fixed costs, Juvenza's EBITDA grows 13.7%, 27.4% and 41.1% when volumes grow 5%, 10% and 15%, and the margin rises from 24% to as much as 29.5%.
Step 2Which scenario is the price paying for?

Turn the price into an EBITDA number. Rs 7,300 crore at 18x forward EBITDA implies Rs 405.6 crore next year, within a crore of the bull case of Rs 406.4 crore. That is the market-impliedThe forecast that makes the current price fair at a stated multiple or discount rate, found by working backwards from the price. forecast: the market is already paying for 15% volume growth. In the base case the same 18x gives Rs 6,605 crore, 10% below today; in the bear case Rs 5,895 crore, 19% below.

Three volume paths, one price: the market is paying for the bull case280320360400This yearNext yearToday: 288Bear: volume +5%, EBITDA 327 (+14%)Base: volume +10%, EBITDA 367 (+27%)Bull: volume +15%, EBITDA 406 (+41%)Price implies 406 (EV 7,300 at 18x)
Juvenza's next-year EBITDA is Rs 327 crore, Rs 367 crore or Rs 406 crore under 5%, 10% and 15% volume growth, and the Rs 7,300 crore enterprise value at 18x implies Rs 406 crore, the bull case.
Step 3Why do scenarios matter more for this company than for most?

Because fixed costs stretch the gap between good and bad years. Scenarios matter most when fixed costs are high: with 55% fixed, bear and bull EBITDA are Rs 79 crore apart; with 20% fixed they would be only Rs 47 crore apart. A company with high fixed costs priced for its bull case has the widest possible fall if volumes disappoint. Say the limit too: fixed costs rarely stay flat, and 6% wage and rent inflation would take about Rs 30 crore off every scenario, pushing even the bull case below what the price implies.

High fixed costs widen the gap between bear and bull280310340370400Next-year EBITDA, Rs crore, bear to bullJuvenza: 55% of costs fixed327406spread 79Same lab, 20% of costs fixed312359spread 47
With 55% of its costs fixed, Juvenza's bear-to-bull EBITDA range is Rs 79 crore wide, against Rs 47 crore for the same lab with 20% fixed costs, so the scenario call matters far more.

Close with the view: Juvenza is priced for 15% volume growth with no cost inflation, so the evidence to watch is monthly test volumes per centre and the pace of new centre openings. Volume growth that holds at 15% keeps the price fair; anything nearer 10% makes it expensive.

Where candidates lose it

The common loss is growing EBITDA in line with volumes, 5%, 10% and 15%, which ignores the fixed costs the interviewer spelled out and understates every scenario.

The second is building the scenarios and never comparing them with the price. The question asks which one the market is paying for; the answer lives in turning Rs 7,300 crore back into an EBITDA figure.

What the interviewer asks next

  • What volume growth would make the current price fair at 16x instead of 18x?
  • Prices per test fall 3% in a price war. Rework the base case.
  • How would you probability-weight the three scenarios into one value?

Company names and figures are illustrative.