Paper LBO with a revenue build: a diagnostics chain runs 20 analysers with known daily capacity, rising utilisation and a fixed price per test. Build revenue from capacity, compute the sponsor's return, and say what you would challenge.

On the plan the sponsor makes about 1.93x and an IRR of about 14.0%, and about two thirds of the gain comes from utilisation rising from 60% to 85%. Capacity is 52.8 lakh tests a year, so revenue grows from Rs 142.6 crore to Rs 202.0 crore and EBITDA from Rs 35.6 crore to Rs 50.5 crore. If practical utilisation tops out at 80%, the IRR falls to about 12.4%; if it stays at 60%, about 3.3%.

A restaurant with 20 tables, two sittings a night and 300 nights a year can serve at most 12,000 sittings, whatever its spreadsheet says. Start from what the equipment can physically do, then multiply by how much of it is used and by the price. Pariksha's 20 analysers at 800 tests a day for 330 days can run 52.8 lakh tests a year. At 60% utilisation that is 31.68 lakh tests; at Rs 450 each, revenue of Rs 142.56 crore and, at a 25% margin, EBITDA of Rs 35.64 crore. Every five points of utilisationThe share of rated capacity actually used. For a lab, tests billed divided by the tests the analysers could run in the days they are available. is worth about Rs 11.9 crore of revenue and Rs 2.97 crore of EBITDA.

Entry EBITDA of Rs 35.64 crore at 12x is an enterprise value of Rs 427.68 crore, funded with Rs 142.56 crore of debt, 4x, and Rs 285.12 crore of equity. Because depreciation equals capex and working capital is flat, free cash flow is simply net income, and all of it goes to repay the loan. Interest falls as the loan shrinks and EBITDA rises, so the cash available for repayment more than doubles over the five years.

Split the gain into its engines. EBITDA growth at a constant 12x adds Rs 178 crore of equity value and debt paydown adds Rs 87 crore; there is no multiple expansion, so the deal is a bet on utilisation. Price is held flat and the margin is fixed, so the only thing that moves EBITDA is the share of the machines in use. That is unusual in a paper LBO and it is the point of the question: when one driver carries the case, the interviewer wants to see whether you test it or just multiply it.

Test the plan against the machines and against the patients. On the machines: 85% of rated capacity is 680 tests per analyser per day, every working day. Rated throughput assumes continuous loading, but samples arrive in a morning rush, quality-control runs and repeat tests use capacity without being billed, and urgent samples are run in small batches. Assume labs rarely sustain more than about 80% of rated capacity, and the plan's year 5 asks for more than the analysers can practically give. Capped at 80%, exit EBITDA is Rs 47.5 crore and the IRR falls to about 12.4%. On the patients: at three tests a visit, year 5 needs about 4,533 visits a day across the network, up from about 3,200. Ask where the extra patients come from, at Rs 450 a test, against competitors. Ask management for the best lab's actual utilisation; it is the evidence that settles the 80% assumption either way.

Close with a view. At 12x in and 12x out with 4x leverage, this is a mid-teens return on the plan and a low-teens return on a realistic ceiling, so the sponsor is paying for utilisation it has not yet seen. To make it work it needs a lower entry multiple, more analysers bought with the cash flow once the existing ones are full, or price increases the plan does not assume. The limit of the build is that it treats all tests alike; a shift towards higher-priced specialised tests could lift revenue without more capacity, and that is the next question to ask.