Rajvik Industries is offered 8x EBITDA for a non-core division, but the sale triggers tax. Should it sell the division or keep it?

On these numbers Rajvik should keep the division: it is worth about Rs 500 crore to Rajvik against Rs 420 crore of after-tax sale proceeds. Rs 35 crore of free cash flow growing 3% at a 10% cost of capital is worth 35 / 7%, Rs 500 crore. The sale needs a price of about Rs 587 crore, 9.8x EBITDA, to match, or a belief that growth is below 1.7% a year.

Think of a flat you own and rent out. A buyer offers you a price; your broker takes a fee and the taxman takes a cut of the gain. You sell only if what lands in your account beats what the rent is worth to you over the years. A divestment is the same choice: after-tax proceeds against the value of the cash flows you give up. The headline multiple is the buyer's language, not yours. What matters to Rajvik is the cash it ends up holding against the cash it stops receiving.

Value the keep case with a growing perpetuityA cash flow that continues forever and rises at a constant rate. Its value today is next year’s cash flow divided by the discount rate less the growth rate.: Rs 35 crore next year divided by 10% less 3% is Rs 500 crore. The sell case is Rs 480 crore less Rs 60 crore of tax, Rs 420 crore. Keeping is worth Rs 80 crore more, so a sale at this price would transfer value from Rajvik's shareholders to the buyer.

Work out the tax basis first. Tax of Rs 60 crore on the gain at 25% means a gain of Rs 240 crore, so the division's tax basis is Rs 240 crore. A price P leaves P less 25% of (P less 240) after tax. Set that equal to Rs 500 crore and P is about Rs 587 crore. Rajvik needs about 9.8x EBITDA, not 8x, before a sale leaves its shareholders no worse off. That is the number to take back to the buyer.

Or turn it round: what growth would make Rs 420 crore a fair swap? Solve 35 divided by (10% less g) equals 420, and g is 1.67%. If the board believes the division's cash flow will grow less than about 1.7% a year, selling at 8x is the better choice. At zero growth the division is worth only Rs 350 crore, and the sale wins comfortably.

Three things, each of which can move the inputs above. Is 10% the right discount rate for this division? Rajvik's group cost of capital may be too low for a riskier unit; at 11.33% or more, selling wins. Can Rajvik actually deliver 3% growth if management sees the unit as non-core and starves it of capital? And what happens to the Rs 420 crore: paying down expensive debt or funding a project earning above 10% adds value, while leaving it in the bank does not.

Also read the buyer. A strategic buyer paying 8x presumably expects synergies that make the division worth more to it than to Rajvik, which is the room to negotiate. Free cash flow is 58% of EBITDA here, so a buyer quoting EBITDA multiples is paying about 13.7x the cash the unit produces. A strong close: keep at 8x, sell at about 9.8x or better, and confirm the tax figure with advisers, because the after-tax number decides it.