A cement company needs Rs 1,500 crore for a new plant and can fund it with debt, new equity, or its own cash plus debt. Compare leverage and liquidity under each, and say which mix a lender should prefer.

All debt and cash plus debt both take net debt to Rs 2,600 crore, 2.89x EBITDA; all equity keeps it at 1.22x. Spending cash raises net leverage exactly as borrowing does, and also cuts liquidity from Rs 700 crore to Rs 200 crore during the build. From a lender's seat, Rs 500 crore of equity with Rs 1,000 crore of debt is the better mix: 2.33x, cash kept, and under the 3.0x cap even if EBITDA falls 20%.

Paying for a car from savings feels different from taking a car loan, but either way you end up with less money between you and the next emergency. Net debt is debt less cash, so Rs 500 crore of cash spent raises net debt by exactly as much as Rs 500 crore borrowed: both the all-debt and the cash-plus-debt options end at net debt of Rs 2,600 crore, 2.89x EBITDA. All new equity leaves net debt at Rs 1,100 crore, 1.22x, because the plant is paid for with money that never has to be repaid.

Because net debt assumes the cash will always be there to repay debt, and the cash is exactly what a company spends first when things go wrong. For the next two years the plant earns nothing, so interest, cost overruns and a weak cement season must all be met from existing EBITDA and the cash pile; Rs 200 crore is a much thinner cushion than Rs 700 crore. A lender reads liquidityThe cash and undrawn credit lines a company can use at short notice to meet its payments, separate from how much it owes in total. separately from leverage for this reason: leverage tells you whether the debt can be repaid over years, liquidity tells you whether the company survives the next bad quarter. The cash option also has one honest advantage, lower gross debt and so less interest, but it buys that saving with the cushion.

Test each option in the downside case, because a covenant is breached in bad years, not average ones. With EBITDA 20% lower, at Rs 720 crore, both the all-debt and the cash-plus-debt options reach 3.61x and breach the 3.0x cap, while Rs 500 crore of equity plus Rs 1,000 crore of debt reaches 2.92x and keeps all Rs 700 crore of cash. The all-debt option has headroom for only a 3.7% fall in EBITDA before breaching; the mix can absorb 22.2%.

So the lender should push for Rs 500 crore of new equity alongside Rs 1,000 crore of debt, with the cash left on the balance sheet. All equity is safest for the lender but the most expensive for the company's shareholders, who would be diluted to fund a plant that should support some debt. The limitation is timing: once the plant runs and adds Rs 250 crore of EBITDA, even the all-debt option falls to 2.26x, so the risk sits almost entirely in the two-year build. A lender who accepts more debt should ask for that risk to be covered in another way, such as a cash sweep or a tighter covenant until the plant is running.