Case 080Private credit and direct lendingHard
Should the credit fund lend Rs 200 crore to a construction company with a Rs 2,400 crore order book, 150 receivable days and Rs 150 crore of mobilisation advances? Value it and test repayment.
1The situation
Shilpkar Infra Builders builds roads and water pipelines for state agencies. Revenue is Rs 900 crore at a 12% EBITDA margin and the order book is Rs 2,400 crore, about 2.2 years of work at next year's run rate. Clients pay slowly: receivables stand at 150 days of revenue. Clients also pay mobilisation advancesMoney a client pays a contractor up front to set up a site, recovered by deductions from later bills as the work progresses. of Rs 150 crore in total, which are recovered from future bills. Suppliers are paid at 90 days of cost.
Management expects 20% revenue growth next year as the order book converts, and expects advances to fall to Rs 120 crore as old projects finish. Depreciation is Rs 20 crore, capex Rs 25 crore, tax 25%. Existing debt is Rs 100 crore. The company wants a Rs 200 crore five-year loan at 12% to fund the growth. Comparable contractors trade at 5x EBITDA.
2Your task
Value the company, work out how much cash it has to service the loan next year, and decide whether to lend.
Quick check
Revenue grows 20% next year at a steady 12% margin. Does cash available for the lender go up or down?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Do not lend Rs 200 crore on these terms; the value is there but the cash is not. At 5x EBITDA of Rs 108 crore the company is worth about Rs 540 crore, so Rs 300 crore of total debt is 56% of value and 2.8x EBITDA, which looks safe. But next year's growth absorbs Rs 65 crore of working capital, more than the Rs 50 crore left after interest, tax and capex, so the year ends about Rs 15 crore short. Repayment depends on collecting receivables, so lend less, against the receivable book, with an escrow on client payments.
Step 1What is the company worth, and does that answer the question?
Value it first because the interviewer asked, then explain why value is not the test. EBITDA is 12% of Rs 900 crore, Rs 108 crore, and at the 5x the sector trades on the company is worth about Rs 540 crore. Total debt after the loan would be Rs 300 crore, 56% of that value and 2.8x EBITDA. A lender reading only those two ratios would say yes. The order book of Rs 2,400 crore, 2.2 years of work, makes the revenue look secure. But a contractor's problem is never the order book; it is being paid for it.
Step 2Where is the cash in a construction business?
In the working capital cycle. Think of a caterer who buys the food, cooks it, serves the wedding and is paid five months later, having taken a small deposit up front. At 150 days, receivables are Rs 370 crore, nearly half a year of revenue sitting with clients; against that the company holds Rs 150 crore of advances and Rs 195 crore of unpaid supplier bills, so net working capital is Rs 25 crore today. That looks small only because the advances and payables are financing the receivables. Advances are repaid by deduction from future bills, so they are debt from clients, not profit.
Step 3How much cash reaches the lender next year?
Work the growth year. Revenue Rs 1,080 crore, EBITDA Rs 130 crore. Interest on Rs 300 crore at 12% is Rs 36 crore; tax on profit after depreciation and interest is Rs 18 crore; capex Rs 25 crore. That leaves Rs 50 crore before working capital, and working capital then takes Rs 65 crore: receivables up Rs 74 crore, payables up only Rs 39 crore, advances down Rs 30 crore. Cash for the lender is below zero: a shortfall of about Rs 15 crore, on a Rs 200 crore loan, which means part of the loan funds the gap. Interest is covered 3.6 times by EBITDA, but principal is covered by nothing except future collections.
| Next year, Rs crore | Amount |
|---|---|
| EBITDA | 130 |
| Interest on Rs 300 crore at 12% | (36) |
| Tax | (18) |
| Capex | (25) |
| Cash before working capital | 50 |
| Increase in receivables | (74) |
| Increase in payables | +39 |
| Advances recovered by clients | (30) |
| Cash available for the loan | (15) |
Step 4What is the decision, and what would make it a yes?
Decline the Rs 200 crore as asked. Offer a smaller facility, perhaps Rs 120 crore, secured on the receivable book with an escrow that routes client payments through the lender, a covenant on receivable days, and a cash sweep of collections above a threshold. The things to check are the ageing of the Rs 370 crore of receivables, how much is retention money held until project completion, and which clients pay late. A contractor can be worth 5x EBITDA and still default, because value is in the order book and cash is in the collection queue, and a lender is repaid from the second.
Where candidates lose it
The usual loss is answering on leverage: 2.8x EBITDA, 56% of value, lend. Those ratios assume EBITDA turns into cash, and in construction it does not until clients pay, which here takes five months and gets worse as the company grows.
The second is treating mobilisation advances as the company's money. They are a client liability recovered from future bills, so as old projects finish the advances shrink and the cash goes back out.
What the interviewer asks next
- Receivable days fall to 100 as a new state pays on time. How much cash does that release, and does the loan work then?
- The company offers a first charge on its equipment worth Rs 150 crore. Does that change your answer?
- Why do contractors with growing order books so often run out of cash?
Asked at Bain Capital, Credit, New York, 2024 (Wall Street Oasis): They asked me to value a constrction company's value and whether they are worth it for Bain to loan credit to them
Company names and figures are illustrative.