Pitch Bhandarika Logistics, a warehousing company with 18 million sq ft, 91% occupancy, 5% annual rent escalation and a 12% yield on new capex. Is its growth funded by debt or by cash flow, and what is the pitch?

Cash flow funds only about 20% of the build; debt funds the other 80%, so the growth works only while the 12% yield on cost stays well above the 8.5% cost of debt. The pitch: 5% escalation compounds the rent, each Rs 750 crore built earns Rs 90 crore against Rs 51 crore of new interest, and the market capitalises income at 6.1%, so building at 12% creates value. The one risk is the spread: higher rates or a yield on cost nearer 9% leave a company with 5.4 times leverage and little margin.

A family that earns Rs 1.5 lakh a month and is building a Rs 7.5 lakh extension every year is not paying for it from salary; it is borrowing, and the extension had better earn rent. Trace Bhandarika's cash from rent to the build programme and the answer is plain: Rs 432 crore of rent becomes Rs 368 crore after property costs, Rs 168 crore after interest and tax, and Rs 148 crore after maintenance, against a build programme of Rs 750 crore. Cash flow covers 20% of it; the remaining Rs 602 crore a year is borrowed. Growth is debt funded, and saying so clearly in the first sentence is what the fund manager is listening for.

Yes, on the numbers given, and the test is a spread. Each Rs 750 crore built earns Rs 90 crore of operating cash at a 12% yield on costThe operating cash a new property earns each year divided by what it cost to build, a measure of the return on growth capital., while the Rs 602 crore borrowed to fund it costs Rs 51 crore of interest. Every year of building adds about Rs 39 crore of cash after interest, a 3.5 point spread on borrowed money, and that is what makes leveraged growth accretive rather than reckless. The market makes it better still: at an enterprise value of Rs 6,000 crore the company is capitalised at 16.3 times operating cash, a 6.1% capitalisation rate, so Rs 90 crore of new income is worth about Rs 1,469 crore against Rs 750 crore spent, roughly Rs 719 crore of value a year, 18% of the market value.

The pitch has three lines. Bhandarika's rent compounds by contract: 5% escalation on a 91% let portfolio grows operating cash before a single new shed is built. It builds at 12% and borrows at 8.5%, so growth adds cash after interest, and the market pays 16.3 times for income it creates at 8.3 times cost. And leverage does not rise: it eases from 5.4 to about 4.7 times operating cash, because income grows faster than debt. The one risk is the spread: the thesis lives on 12% minus 8.5%, and both ends can move against it. If rates rise two points, borrowing costs 10.5% and the spread halves; if cost overruns or slow lease-up cut the yield on cost to 9%, the spread is 0.5 points, barely enough to carry a vacant year. Both at once and the company is building for nothing with 5.4 times leverage. So the question to ask management is not the growth plan but the evidence for 12%: the leases signed on the last three completions, the months from completion to full occupancy, and the share of the pipeline already pre-let.

Two caveats belong in an honest pitch. The 12% is management's figure for a stabilised warehouse; during construction and lease-up the space earns nothing while the debt costs 8.5%, so the real spread in the first eighteen months of each project is negative, and the roll-forward above assumes the new space is let on day one. And the 5% escalation is contractual only until the lease expires; at renewal rent resets to market, which can be lower. Neither breaks the pitch; both belong in the sentence after it.