Case 033Growth equity returnsHard
Modeling test and write-up: build a five-year revenue model for Nukkadvik Stores, a convenience chain adding 60 stores a year, then work out a growth investor's MOIC and IRR at 20x year-five EBITDA.
1The situation
Nukkadvik Stores runs 150 neighbourhood convenience stores, each mature and doing Rs 2.4 crore of sales a year. It plans to open 60 new stores every year for five years. A new store does 60% of a mature store's sales in its first year and is mature from its second. Chain EBITDA margin is 4% today and the plan takes it up by a point a year to 8% in year 5.
A growth investor puts in Rs 200 crore for 25% of the company, all primary, so the post-money valuation is Rs 800 crore. Assume the new money and the chain's own cash flow fund the openings, leaving no debt and no spare cash at exit, and that the investor exits at the end of year 5 at 20x that year's EBITDA.
2Your task
Build the revenue and EBITDA model, compute the investor's MOIC and IRR, and say in the write-up which half of the return is less certain.
Quick check
Before building anything: roughly what money multiple do you expect on the Rs 200 crore?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
The investor makes about 2.04x and an IRR of about 15%. Year-5 revenue is Rs 1022.4 crore from 390 mature and 60 new stores; at 8% that is Rs 81.8 crore of EBITDA, Rs 1,636 crore at 20x, and the 25% stake is worth Rs 409 crore. Store growth carries about 59% of the gain and the margin ramp about 41%. The margin ramp is the less certain half.
Step 1How do you lay out a store rollout model?
By vintage, the way a school counts students by the year they joined. Each year's intake behaves differently in its first year and then joins everyone else. Model the existing 150 stores, then each year's 60 openings as a separate layer that does 60% of a mature store's sales in year one and the full Rs 2.4 crore after. In year 1 that is 150 times Rs 2.4 crore, Rs 360 crore, plus 60 new stores at Rs 1.44 crore, Rs 86.4 crore: Rs 446.4 crore. Every later year adds one more mature layer of Rs 144 crore and one new layer of Rs 86.4 crore.
| Year | Mature stores | New stores | Revenue, Rs cr | EBITDA margin | EBITDA, Rs cr |
|---|---|---|---|---|---|
| 1 | 150 | 60 | 446.4 | 4% | 17.9 |
| 2 | 210 | 60 | 590.4 | 5% | 29.5 |
| 3 | 270 | 60 | 734.4 | 6% | 44.1 |
| 4 | 330 | 60 | 878.4 | 7% | 61.5 |
| 5 | 390 | 60 | 1022.4 | 8% | 81.8 |
Step 2What is the return, and what does the entry price assume?
Exit value is 20 times Rs 81.8 crore, Rs 1,636 crore. The investor's 25% is worth Rs 409.0 crore against Rs 200 crore paid, 2.04x in five years, an IRR of about 15.4%. Now look at what was paid. Today the chain earns 4% of Rs 360 crore, Rs 14.4 crore. At 20x that is Rs 288 crore, and 25% of it is Rs 72 crore. The investor paid Rs 200 crore, so Rs 128 crore of the price is a payment for the plan, recovered only if the plan happens.
Step 3Which half of the return is less certain?
Split the value created between the two engines. Revenue growth and margin interact, so give each half the overlap: store growth carries about 59% of the gain and the margin ramp about 41%. Store openings are within management's control and testable against its record: how many stores it opened last year, and whether new stores really reach Rs 2.4 crore. The margin doubling is not. It depends on head office costs being spread over more stores, better supplier terms, and mature stores holding their sales as new ones open nearby.
| Case | Year-5 EBITDA, Rs cr | Stake at exit, Rs cr | MOIC | IRR |
|---|---|---|---|---|
| Plan | 81.8 | 409 | 2.04x | 15.4% |
| Margin reaches only 6% | 61.3 | 307 | 1.53x | 8.9% |
| 40 stores a year, not 60 | 64.1 | 321 | 1.60x | 9.9% |
| Exit at 15x, not 20x | 81.8 | 307 | 1.53x | 8.9% |
The write-up, in three sentences, is what the test is really marking. The model gives about 2x and 15% on the plan. The return rests on doubling the margin, which the company has not yet shown, more than on the store count, which it has. I would invest only with evidence of margin at the oldest stores, or at a price that still clears the hurdle if margin stops at 6%. A model with no stated judgement is half an answer.
Where candidates lose it
The common loss is modelling every new store at full sales from the day it opens. That adds Rs 57.6 crore of revenue in every year and overstates the exit, which is exactly the shortcut the ramp assumption is there to catch.
The second is handing in the numbers without the write-up's view. The test asked for a judgement on which half is less certain; a perfect model with no sentence about the margin ramp misses the point.
What the interviewer asks next
- What entry valuation gives a 20% IRR on the plan?
- New stores cannibalise 5% of a neighbouring mature store's sales. How does year-5 EBITDA change?
- Would you rather have a margin-linked ratchet or a lower price, and why?
Asked at General Atlantic, Generalist, Beijing, 2014 (Wall Street Oasis): team members (Not as many as it sounds) and a modeling test (+ a write-up)
Company names and figures are illustrative.