Case 020Market sizing and thesesWarm up

How would you evaluate a company riding a trend? Pawvik Petcare grew revenue from Rs 40 crore to Rs 58 crore while its market grew 30%. How much of the growth is the trend, how much the company, and what happens if the market slows?

General Atlantic, New York, NYUSA · 2018

The situation

Pawvik Petcare sells premium pet food and supplements online and through pet stores. Its revenue grew from Rs 40 crore to Rs 58 crore last year, 45%. The founders' deck credits the brand and the product range. Over the same year the premium pet care market, by the deck's own estimate, grew from Rs 2,000 crore to Rs 2,600 crore.

The deck's plan for next year assumes the market grows another 30% and Pawvik keeps gaining share at the same relative pace as last year.

Your task

Split last year's Rs 18 crore of revenue growth into what the market gave and what Pawvik earned. Then show what happens to next year's plan if market growth halves.

Quick check

Of Pawvik's Rs 18 crore of revenue growth, how much would it have had just by holding its market share?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

About two thirds of Pawvik's growth was the market: Rs 12 crore of the Rs 18 crore came from a 30% rise in the market at a constant share, and Rs 6 crore from gaining share. Next year's plan of about Rs 84 crore depends mostly on the market. If market growth halves to 15%, the same share gain delivers about Rs 74 crore, Rs 10 crore short.

Step 1How do you separate the trend from the company?

When the tide comes in, every boat in the harbour rises, including the ones with holes in them. To judge a company in a fast-growing market, first ask what it would have earned by standing still in that market, and credit it only with the growth beyond that. Standing still means holding its share. Pawvik had Rs 40 crore of a Rs 2,000 crore market, 2.0%. If it had kept exactly 2.0% of a market that grew to Rs 2,600 crore, revenue would have been Rs 52 crore.

So Rs 12 crore of the growth is the tide. The rest, Rs 6 crore, is the swimmer: Pawvik's share rose from 2.0% to 2.23% of the larger market, and 0.23 points of Rs 2,600 crore is Rs 6.0 crore. Pawvik did gain share, which is real evidence for the brand, but its 45% growth would have been 30% with no effort at all. The deck's story credits the brand for all of it.

Rs 18 crore of new revenue: how much is the tide, how much the swimmer?40Last year+12Market grew 30%+6Share 2.0% to 2.23%58This yearTwo thirds of the growth came from the market: 12 of the 18 crore.
Of Pawvik's Rs 18 crore of new revenue, Rs 12 crore came from the market growing 30% at an unchanged 2.0% share and Rs 6 crore from raising its share to 2.23%, so two thirds of the growth was the market.
Step 2What happens to next year's plan if the market slows?

Rebuild the plan the same way. Pawvik's share grew 11.5% in relative terms last year; repeating that takes it to 2.49%. With the market up another 30% to Rs 3,380 crore, revenue is about Rs 84.1 crore, up 45%. If market growth halves to 15%, the same share gain gives Rs 74.4 crore, up 28%: Rs 9.7 crore short of plan with no change in how well the company performs. If the market stopped growing entirely, revenue would be about Rs 65 crore, up only 12%.

Next year if the market keeps growing 30%, and if it slows to 15%, Rs croreMarket +30% (plan)84.1, +45%Market +15%74.4, +28%This year58Same share gain in both rows; the slower market alone removes Rs 9.7 crore,cutting growth from 45% to 28%.
With the same share gain, Pawvik reaches Rs 84.1 crore next year if its market grows 30% but only Rs 74.4 crore if the market grows 15%, a Rs 9.7 crore shortfall caused by the market alone.
Step 3How would you evaluate the company, then?

Three questions follow. Is the market estimate itself reliable, given that it comes from the founders' deck and moves the whole answer? Is the trend durable, or is it a post-pandemic surge in pet adoption that will normalise? And is the share gain repeatable, or did it come from one new retail partner or a burst of discounting? An investor should pay for the share gain and price the tide cautiously, because the tide is available to every competitor and can go out.

The limitation of the split is that it treats market growth and share gain as separate, when in practice a brand can help grow its own category. Still, the arithmetic changes the conversation in the room: the partner now knows that two thirds of the growth story belongs to the market, and that the plan depends on the market more than the pitch admits.

Where candidates lose it

The usual loss is accepting 45% growth as the company's achievement. Without the share calculation, a candidate cannot tell a strong brand in a flat market from an average one in a booming market, which is the whole question.

The second is computing the share gain on the old market size, 0.23 points of Rs 2,000 crore, and getting Rs 4.6 crore. The share gain is earned in the market as it is now, Rs 2,600 crore.

What the interviewer asks next

  • How would you check the founders' market estimate independently?
  • A competitor's revenue grew 25% in the same market. What does that tell you about Pawvik?
  • What market growth would make Pawvik's plan of 45% growth impossible even with double the share gain?

Asked at General Atlantic, Leveraged Buyouts, New York, NY, USA, 2018 (Wall Street Oasis): Questions about how I would evaluate a company / trend

Company names and figures are illustrative.