Seasonality case: 60% of a stationery maker's revenue comes in two back-to-school months and inventory peaks at Rs 120 crore. How much working capital funding does it need, and what does that mean for debt sizing?

Working capital peaks at about Rs 192 crore at the end of May and troughs at about Rs 40 crore, so the business needs roughly Rs 152 crore of seasonal funding on top of a permanent Rs 40 crore. The peak comes after the inventory peak, because shipped stock becomes receivables before it becomes cash. A term loan sized on EBITDA cannot cover a need that lasts three months, so the package needs a revolver of about Rs 160 crore drawn from March to July, with covenants tested at quarter ends that fall on the right side of the season.

Because selling stock on credit moves the money from one working capital line to another. A sweet shop that makes mithai for Diwali has its cash tied up in sugar in September, in boxes in October, and in the unpaid bills of its corporate customers in November. At the end of April, inventory is Rs 120 crore but receivables are only Rs 24 crore of normal sales; at the end of May inventory has fallen to Rs 75 crore but receivables are Rs 180 crore of May's sales, so net working capitalInventory plus receivables less payables: the cash the business has tied up in trading at a point in time. is Rs 192 crore, the peak. June is lower only because payables for the season's purchases are still unpaid; by Jul the business is back to Rs 40 crore.

It splits the debt into two jobs. The term loan, 4x EBITDA or Rs 360 crore, is sized on what the business earns over a year and should be repaid from a year's cash; the seasonal Rs 152 crore is a three-month need and belongs on a revolverA revolving credit facility the borrower can draw and repay as needed, usually secured on inventory and receivables, used for short-term swings. secured on the stock and the receivables, drawn from March and cleared by August. Size the revolver to the peak with headroom, about Rs 160 crore, not to the average of Rs 72 crore, because an average is a number the business never actually sits at. A lender who draws the package without the revolver is forcing the sponsor to fund the season with equity or to miss the season, and a stationery company that cannot build stock in March has no year.

The dates on which everything is measured. A leverage covenant tested on 30 June, when the term loan plus a fully drawn revolver sits against twelve months of EBITDA, looks worse than the same business on 30 September; the facility should test on net debt after the season or exclude the revolver when it is covered by receivables. Cash interest falls in the months when there is no cash, so the schedule should amortise after the collections arrive. And the stress case is a bad season: if May and June come in 20% light, Rs 72 crore of revenue and about Rs 29 crore of contribution are gone and the stock is still on the shelf, which is the scenario the revolver's borrowing base has to survive.