Case 067Equity research and stock pitchesCore

Rapid-fire investing case: Madhurima Biscuits has revenue of Rs 3,000 crore, a 12% EBITDA margin and raw materials at 33% of revenue. If wheat and sugar rise 10%, what happens to EBITDA, what price rise restores it, and what volume loss would cancel that price rise?

Fidelity InvestmentsToronto · 2024

The situation

Madhurima Biscuits, a listed packaged foods company, sells Rs 3,000 crore of biscuits a year at a 12% EBITDA margin, Rs 360 crore. Wheat flour and sugar, its main raw materials, cost 33% of revenue, Rs 990 crore. Packaging, freight and other costs that move with volume add Rs 750 crore, and fixed costs such as plants, salaries and advertising are Rs 900 crore.

Wheat and sugar prices have just risen 10%. The interviewer fires three questions in a row and wants each answer in a sentence.

Your task

What happens to EBITDA, what price rise restores it, and how much volume can Madhurima lose before the price rise is cancelled out?

Quick check

Raw materials are 33% of revenue and the margin is 12%. A 10% rise in raw materials cuts EBITDA by roughly how much?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

EBITDA falls Rs 99 crore, about 27.5%, to Rs 261 crore; a 3.3% price rise restores it; and a volume loss of about 7.9% would cancel that price rise. The shock is 3.3% of revenue against a 12% margin. Each point of volume is worth about Rs 12.6 crore of contribution, so the price rise works only if volumes fall by much less than 8%.

Step 1Why does a 10% rise in wheat and sugar hit profit so hard?

A tea stall that sells each cup for Rs 10 and keeps Rs 1.20 of profit is wiped out by a small rise in milk prices that a stall keeping Rs 4 would barely feel. The thinner the margin, the larger a cost shock looks against profit. Madhurima's shock is 10% of Rs 990 crore, Rs 99 crore, which is only 3.3% of revenue. Against Rs 360 crore of EBITDA it is 27.5%. In a rapid-fire round, say the rupee figure first and the percentage second: it shows the working.

Step 2What price rise restores profit, and is there a catch?

At the same volume, Madhurima needs Rs 99 crore more revenue: 99 divided by 3,000, a 3.3% price rise. That restores EBITDA in rupees. Restoring the 12% margin needs more, about 3.75%, because the higher cost base must also carry the margin. Say which one you mean; interviewers often ask the second as a follow-up. In packaged foods the rise often comes as a smaller pack at the same price rather than a new price, which works the same way arithmetically.

The input shock, the price answer, and the volume loss that undoes it, Rs crore360Base EBITDA12% margin-99Wheat, sugar +10%33% of revenue+99Price +3.3%same volume-99Volume -7.9%lost contribution261End EBITDAprice rise undoneWithout a price rise EBITDA falls 27.5%; a 7.9% volume loss after the price rise leaves the same 261
A 10% rise in wheat and sugar takes Rs 99 crore off Madhurima's Rs 360 crore of EBITDA, a 3.3% price rise puts it back, and a volume loss of 7.9% takes the same Rs 99 crore away again, leaving EBITDA at Rs 261 crore.
Step 3How much volume can it lose before the price rise is wasted?

Work out what each unit contributes after the price rise. Revenue at the new price is Rs 3,099 crore; costs that move with volume are the raw materials at Rs 1,089 crore and other variable costs of Rs 750 crore. That leaves Rs 1,260 crore of contributionRevenue minus the costs that rise and fall with volume; what each extra unit sold adds towards fixed costs and profit., about Rs 12.6 crore for each 1% of volume. Losing Rs 99 crore of contribution takes a 7.9% fall in volume, at which point the price rise has achieved nothing.

Rs croreBefore the shockShock, no price risePrice +3.3%Price +3.3%, volume -7.9%
Revenue3,000.03,000.03,099.02,855.5
Wheat and sugar990.01,089.01,089.01,003.4
Other variable costs750.0750.0750.0691.1
Fixed costs900.0900.0900.0900.0
EBITDA360.0261.0360.0261.0
Madhurima's EBITDA falls from Rs 360 crore to Rs 261 crore after the input shock, returns to Rs 360 crore with a 3.3% price rise at the same volume, and falls back to Rs 261 crore if volume drops 7.9%.
Step 4What would you say to close the rapid-fire round?

Turn the arithmetic into a judgement in one line. A 7.9% volume loss for a 3.3% price rise means demand would have to fall 2.4 times as fast as price rises, which is unusual for an everyday branded food unless rivals hold their prices. So the question that decides the stock is not the wheat price; it is whether competitors raise prices too. If they do, Madhurima recovers most of the margin within a couple of quarters; if a rival holds prices to gain share, Madhurima faces a choice between margin and volume. The figures are illustrative and the company is invented.

Where candidates lose it

Under time pressure candidates apply the 10% to EBITDA, or to revenue, and say profit falls 10% or 3%. The shock is 10% of the raw material bill, and measured against a 12% margin it is a 27% hit to profit.

The second slip is computing the volume loss against revenue instead of contribution. Each lost biscuit also saves its raw material and packaging, so only the contribution is lost, which is why the break-even volume loss is close to 8%, not 3%.

What the interviewer asks next

  • Madhurima hedges half of its wheat for six months. How does that change the first year?
  • Instead of raising prices it cuts pack size by 3.3%. What might differ in how consumers react?
  • Which matters more for the stock over three years, the wheat price or the share of sales from premium biscuits?

Asked at Fidelity Investments, Equity Research Intern Interview, Toronto, 2024 (Wall Street Oasis): The rapid fire questions in the investing case can be difficult to answer with the time pressure

Company names and figures are illustrative.