Case 073Portfolio operations and exitsCore
Cotton costs rise 8% at an apparel maker with Rs 900 crore of revenue, COGS at 55% and a 12% EBITDA margin. What price increase keeps EBITDA flat, what SG&A cut would, and what does each do to the sponsor's IRR?
1The situation
Vastrika Apparel makes cotton shirts and kurtas sold through its own stores and multi-brand outlets. Revenue is Rs 900 crore, cost of goods sold is 55% of revenue, Rs 495 crore, and EBITDA is Rs 108 crore, a 12% margin. Cotton fabric is half of cost of goods sold. Everything else, stores, staff, marketing and head office, is selling, general and administrative cost, SG&A, and is fixed in the short run.
Cotton prices are expected to rise 8% next year. The sponsor bought Vastrika at 9x EBITDA of Rs 108 crore with 4x debt at 10%. Its plan has EBITDA of Rs 108 crore next year growing 8% a year after that, 50% of EBITDA going to interest and repayment, and an exit at 9x in year 5. An SG&A programme would cost Rs 10 crore once, in severance and store closures. A price rise may cost some volume; test a 2% loss.
2Your task
Size the cost hit, then work out the price increase and, separately, the SG&A cut that would keep EBITDA flat, and say what each choice, and doing nothing, does to the sponsor's IRR.
Quick check
Which needs the bigger percentage move to offset the cotton shock: price or SG&A?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The cotton rise costs Rs 19.8 crore, cutting EBITDA to Rs 88.2 crore; a 2.2% price rise or a 6.7% SG&A cut restores it, and doing nothing drops the sponsor's IRR from about 13% to about 5%. Price works on Rs 900 crore, so the move is small, but if it costs 2% of volume it must be 3.1%. SG&A is only Rs 297 crore, so the cut is large and costs Rs 10 crore to deliver, which leaves IRR near 13%.
Step 1How big is the hit, in rupees and in margin?
Size it from the bottom up, because the percentage in the headline is not the percentage that hits profit. Think of a household where vegetables are a quarter of the monthly budget: if vegetable prices rise 8%, the budget rises 2%, not 8%. Cotton is half of Rs 495 crore of cost of goods, Rs 247.5 crore, so an 8% rise is Rs 19.8 crore, which takes EBITDA from Rs 108 crore to Rs 88.2 crore and the margin from 12.0% to 9.8%. In profit terms that is an 18% fall from an 8% rise in one input, which is why the operating partner calls the moment it is forecast, not after it lands.
Step 2What price rise or SG&A cut would restore EBITDA?
Both levers must find the same Rs 19.8 crore, but they work on very different bases. A price rise works on Rs 900 crore of revenue, so it needs 2.2%; an SG&A cut works on Rs 297 crore, so it needs 6.7%, three times the percentage. Price has a catch. If a 2.2% rise costs 2% of volume, the lost sales take their contribution with them and EBITDA only recovers to Rs 99.9 crore; to get all the way back, price must rise 3.1%. SG&A has its own catch: a 6.7% cut means closing stores or removing people, which costs about Rs 10 crore once and takes months.
Step 3What does each choice do to the sponsor's return?
Run the plan with each version of year 1 EBITDA. Doing nothing carries the lower margin through all five years and the 9x exit multiplies it: exit EBITDA falls from Rs 147 crore to Rs 120 crore, and IRR falls from 13.3% to 5.2%. A full price fix keeps the plan intact. The SG&A fix restores EBITDA too, but its Rs 10 crore one-off cost adds to debt and trims IRR to 13.0%. An under-sized price rise that loses volume leaves IRR at 10.3%. Every Rs 1 crore of lasting EBITDA is worth Rs 9 crore at exit, so a 19.8 crore hole is worth about Rs 178 crore of equity value, a third of what the sponsor put in.
| Response | Year 1 EBITDA | Exit EBITDA | Exit equity | MOIC | IRR |
|---|---|---|---|---|---|
| Plan before the shock, or full price fix | 108.0 | 146.9 | 1008 | 1.87x | 13.3% |
| Do nothing | 88.2 | 120.0 | 696 | 1.29x | 5.2% |
| SG&A cut, Rs 10 crore one-off cost | 108.0 | 146.9 | 993 | 1.84x | 13.0% |
| Price +2.2% losing 2% volume | 99.9 | 135.9 | 880 | 1.63x | 10.3% |
Step 4Which would you recommend to the board?
A mix, led by price, with a test. Price is the smaller and faster lever, and cotton inflation hits every competitor too, so a 2 to 3% rise is likely to stick if rivals follow; SG&A cuts are slower and carry execution risk, so use them for the part price cannot recover. Test before committing: raise prices in a few stores or on a few lines first, and watch volume for a month. Also ask whether the shock is lasting. If cotton falls back next year, a permanent SG&A cut is the wrong fix for a temporary problem, and a hedge or a forward fabric contract may be cheaper than either lever. The limitation: the 2% volume loss is a guess, and it is the number that decides how much of the gap price can close.
Where candidates lose it
The usual loss is applying the 8% to all of cost of goods, or to revenue. Cotton is half of COGS, so the hit is Rs 19.8 crore, not Rs 39.6 crore.
The second is quoting the same percentage for every lever. A Rs 19.8 crore gap is 2.2% of revenue but 6.7% of SG&A; the lever must be sized against its own base, and a price rise must be grossed up for the volume it loses.
What the interviewer asks next
- At what volume loss does a 3.1% price rise stop restoring EBITDA?
- Half the stores are franchised. Does that change which SG&A lever you would pull?
- How would you use a fabric forward contract here, and what does it cost?
- Competitors do not follow the price rise. What happens to your plan?
Asked at Sycamore Partners, Retail, New York, 2026 (Wall Street Oasis): what you would need to do to the P&L to balance an expected decrease / increase in costs
Company names and figures are illustrative.