Case 094Manager evaluation and attributionHard
Dhanvi Diagnostics grew revenue 30% a year for three years: 12 points organic and 18 points from acquisitions bought at 12x EBITDA with debt, while the stock trades at 25x. How much of shareholders' return came from M&A rather than the core business, and how would you judge the quality of that growth?
1The situation
Dhanvi Diagnostics runs pathology labs and collection centres. Three years ago revenue was Rs 1,000 crore at a 20% EBITDA margin, the company had no debt, and the stock traded at 25x EBITDA, an equity value of Rs 5,000 crore. Since then revenue has grown 30% a year to Rs 2,197 crore: each year 12 points came from existing labs and 18 points from buying smaller regional chains at 12x EBITDA, paid for with borrowing.
The multiple has held at 25x. Keep the margin at 20% throughout, and for the first pass ignore interest and cash generation.
2Your task
How much of the equity gain came from M&A, how much from the core business, and how would you judge the quality of the growth?
Quick check
Acquisitions drove 60% of Dhanvi's revenue growth. Roughly what share of the equity gain did they drive?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
M&A drove about 60% of revenue growth but only about 44% of the equity gain, because the deals were bought with debt. Equity rose from Rs 5,000 crore to about Rs 9,261 crore: Rs 2,394 crore from organic growth and a net Rs 1,867 crore from buying EBITDA at 12x inside a 25x stock. That second source is multiple arbitrage: it ends when deal flow or debt capacity does, and it needs the 25x to last.
Step 1How do you split three years of growth into organic and acquired?
Year by year, on the opening revenue: 12% organic, 18% acquired. Across three years that gives Rs 478.8 crore of organic revenue growth and Rs 718.2 crore bought, so acquisitions supplied 60% of the growth. At a 20% margin, EBITDA rose from Rs 200 crore to Rs 439.4 crore: Rs 95.8 crore organic and Rs 143.6 crore acquired. The acquired EBITDA cost 12x, Rs 1,724 crore of new debt.
| Year | Opening revenue | Organic, 12% | Acquired, 18% | Closing revenue |
|---|---|---|---|---|
| 1 | 1,000.0 | 120.0 | 180.0 | 1,300.0 |
| 2 | 1,300.0 | 156.0 | 234.0 | 1,690.0 |
| 3 | 1,690.0 | 202.8 | 304.2 | 2,197.0 |
| Total | 478.8 | 718.2 | 2,197.0 |
Step 2How much of the equity gain did the deals produce?
Value each source at the stock's multiple, then subtract what it cost. Think of a shop owner who buys stock at wholesale and has it valued at retail: the markup is real only while shoppers keep paying retail. Acquired EBITDA of Rs 143.6 crore is worth Rs 3,591 crore inside a 25x stock but cost Rs 1,724 crore, so the deals added a net Rs 1,867 crore; organic growth added Rs 2,394 crore with no new capital. Of a Rs 4,261 crore equity gain, 44% came from M&A, less than its 60% share of revenue, because debt paid for it.
| Delta EBITDA acq | EBITDA bought over three years, Rs 143.6 crore |
| 25 | the multiple the stock puts on it |
| 12 | the multiple Dhanvi paid, in debt |
Step 3How good is the M&A-driven part of the growth?
Paper-good, and fragile. The Rs 1,867 crore exists only while the market pays 25x for everything Dhanvi owns, and the engine that produced it stops when deal flow or borrowing capacity runs out. Net debt is already 3.9x EBITDA, before interest; one more year of 18 points of acquisitions would need about Rs 949 crore more and take leverage to 4.7x. If deals stop and the market re-rates Dhanvi to 18x, a multiple closer to a 12% organic grower, equity is Rs 6,186 crore: 7.4% a year over three years, against 22.8% on paper.
Close with the questions that decide quality, each testable. Is the 12% organic growth clean, measured on labs owned a full year, or flattered by acquired labs? Are acquired chains keeping their doctors and referral networks? What does interest on Rs 1,724 crore do to free cash flow? A strong answer says: the core business is a solid 12% grower worth owning at a fair multiple; the M&A premium is borrowed value that should be priced as temporary.
Where candidates lose it
The common miss is crediting M&A with its share of revenue, 60%, as if the acquired revenue were free. The deals were paid for with debt, and only the gap between the purchase multiple and the stock's multiple belongs to shareholders.
The second is treating multiple arbitrage as a skill that repeats. It depends on the stock keeping its rating and on a supply of cheap targets and debt, and each of those runs out.
What the interviewer asks next
- Add 9% interest on the acquisition debt. How does the three-year equity gain change?
- Dhanvi proposes funding the next deals with new shares at 25x. Is that better for existing shareholders?
- How would you test whether the 12% organic growth is really organic?
- Rank Dhanvi against a peer growing 15% organically with no debt at 22x.
Asked at Viking Global Investors, Private Equity, New York, 2025 (Wall Street Oasis): breakdown of their growth components (what % was driven by M&A, how much of that flowed into returns)
Company names and figures are illustrative.