A construction company with a large order book, 200 days of receivables and Rs 300 crore overdue from state agencies asks for a Rs 400 crore loan. Value it at 6x EBITDA and decide whether to lend.

Do not lend Rs 400 crore unsecured. At 6x EBITDA of Rs 187 crore Nirmanika is worth about Rs 1,122 crore; with the loan, net debt of Rs 1,100 crore would be 98% of that value and 5.9x EBITDA, with interest cover of 1.55x. The order book is 3.5 years of work, but the company collects in 200 days and Rs 300 crore of its receivables is a year overdue from state agencies, so the loan would fund the state's unpaid bills. Offer a smaller facility secured on specific current receivables with an escrow on collections.

Start with value, because a lender's first question is how much of the company stands behind the loan. At 6x EBITDA of Rs 187 crore, Nirmanika's enterprise value is about Rs 1,122 crore, and net debt of Rs 1,100 crore after the loan would be 98% of it. Today's lenders sit at 62% of value and 3.7x EBITDA; the new loan takes leverage to 5.9x against the desk's 4.0x cap and cuts interest cover to 1.55x. Equity would be a sliver of Rs 22 crore. A lender at 98% of value is not lending; it is buying the company with a coupon attached.

A caterer with bookings for every weekend of the year still goes under if the hosts pay six months late. A contractor's order book is revenue it has not yet billed; its receivables are revenue it has billed and not been paid for, and lenders are repaid from the second, not the first. Nirmanika's 200 days of receivables is about Rs 932 crore of work done and unpaid. Rs 300 crore of that is more than a year old and owed by state agencies, which pay when budgets allow, do not pay interest, and cannot be chased in the way a private customer can. Strip the overdue out and the current book is Rs 632 crore, 136 days, which is still slow. Every rupee of growth on the Rs 6,000 crore order book will be billed and then wait 200 days, so the order book is a claim on more working capital, not a source of cash.

Trace one year. EBITDA is Rs 187 crore. Interest on today's debt is Rs 77 crore, tax about Rs 20 crore, capex Rs 30 crore. Growing revenue 15% at 200 days of receivables adds about Rs 140 crore of new receivables, so free cash flow is roughly minus Rs 80 crore before any repayment. That is the hole the loan would fill, and it reopens every year the company grows without collecting faster. If half the overdue Rs 300 crore is eventually written off, EBITDA is overstated too: Rs 150 crore of past revenue never turns to cash, and value falls to about Rs 972 crore, taking the lenders to 113% of it.

Say no to the loan as asked and yes to a structure that lends against collections. A receivables facility of perhaps Rs 150 to 200 crore, advancing against specific current invoices from named agencies, with collections paid into an escrow the lender controls, puts the lender where the cash arrives rather than where the work is done. Exclude anything over 180 days, cap any single agency, and add a covenant that net leverage stays under 4.0x on reported EBITDA with the overdue receivables provided for. Ask for the ageing by agency and the history of how long each agency has actually taken to pay, because that record, not the order book, is what the loan depends on. The limit of the analysis is that state agencies do usually pay in the end; the question is whether a five-year lender can wait as long as they take, and at 98% of value the answer is no.