Rasadhara Chemicals has net debt of Rs 700 crore on EBITDA of Rs 400 crore, a 2.5x covenant and a board rule to keep 0.5x of headroom. With Rs 180 crore a year of free cash flow and Rs 300 crore of growth capex over two years, what is the maximum dividend?

Rs 160 crore over two years under the board's 2.0x rule, of which only Rs 60 crore is cash the business generates; the other Rs 100 crore is borrowed. Two years of free cash flow, Rs 360 crore, less Rs 300 crore of capex leaves Rs 60 crore, taking net debt to Rs 640 crore. The ceiling is 2.0x of Rs 400 crore, Rs 800 crore. If EBITDA slips 10% the ceiling falls to Rs 720 crore and capacity to Rs 80 crore, so pay Rs 60 crore a year and revisit once the plant is running.

Work out all three and take the tightest. Dividend capacity is the smallest of what the cash allows, what the lenders allow, and what the board has promised itself, after the capex it has already committed. A household deciding how much to spend on a holiday asks the same questions: what is in the account after the school fees, how much the bank would still lend, and the family's own rule about keeping three months of expenses in reserve. The board's 2.0x rule, 0.5x inside the covenant, is the family's own rule, and it is the one that binds here.

Cash: Rs 180 crore a year for two years is Rs 360 crore, less Rs 300 crore of capex, Rs 60 crore. With no dividend, net debt falls from Rs 700 crore to Rs 640 crore. Covenant: 2.5x of Rs 400 crore is Rs 1,000 crore, so Rs 360 crore could go out before the lenders objected. Board rule: 2.0x of Rs 400 crore is Rs 800 crore, and the room between Rs 640 crore and Rs 800 crore is Rs 160 crore, the binding answer. Only Rs 60 crore of it is cash the business made; the remaining Rs 100 crore is a dividend funded by borrowing, which is permitted by the rule but worth naming.

That EBITDA holds at Rs 400 crore for two years while the new plant is being built. The ceiling is a multiple of EBITDA, so a 10% fall to Rs 360 crore drops it to Rs 720 crore and the capacity to Rs 80 crore; a 20% fall would leave no room at all. Chemical EBITDA moves with spreads, and a company that pays out Rs 160 crore and then sees margins slip is at 2.2x with its own rule broken and the covenant in sight. The headroomThe distance between a company's actual covenant ratio and the level at which the covenant would be breached. rule exists precisely for the year the capex is spent and the earnings have not yet arrived.

Pay the cash, not the capacity. Rs 60 crore a year, Rs 120 crore in total, keeps net debt below Rs 760 crore, 1.9x, with room for a 5% EBITDA miss, and defers the borrowed Rs 40 crore until the plant is earning. If the board wants to signal confidence, a stated policy of paying out a share of free cash flow after capex, with a special dividend once leverage is back under 1.5x, says the same thing without borrowing to pay it. Say the limit: the analysis holds working capital flat and ignores interest on the extra debt, both of which reduce the real capacity, and a treasury team would run it monthly against the covenant test dates.