Pitch Rinvik Credit, an MSME lender raising Rs 150 crore at 2.5 times post-money book. Show its ROA and ROE, and what a three-point rise in credit cost does to the pitch.

Rinvik earns a 4.31% return on assets and, with four rupees of book for every rupee of equity, a 17.25% return on equity; at an 8% credit cost the ROE falls to 8.25%. The round values the company at Rs 875 crore post-money, about 25 times trailing profit, a price that on illustrative assumptions needs an ROE near 22.5% to earn. The pitch is a good lender at a full price, and its whole risk is the credit cost line: 5.75% is where the ROE stops covering an illustrative 15% cost of equity.

A lender is a shop that sells money: it buys at 11%, sells at 24%, and loses some stock to customers who never pay. Interest income of Rs 192 crore less Rs 66 crore of funding cost is Rs 126 crore of net interest income; take off Rs 40 crore of credit cost and Rs 40 crore of opex and Rs 46 crore is left before tax, Rs 34.5 crore after. On the Rs 800 crore book that is a return on assetsProfit after tax divided by the loan book or total assets; for a lender it measures how much each rupee lent earns before the effect of borrowing. of 4.31%. The book is funded with Rs 200 crore of equity, so each rupee of equity carries four rupees of loans, and the return on equity is 4.31% times four, 17.25%.

Three points of Rs 800 crore is Rs 24 crore, taken from a pre-tax profit of Rs 46 crore. Profit after tax falls from Rs 34.5 crore to Rs 16.5 crore, so ROA goes from 4.31% to 2.06% and ROE from 17.25% to 8.25%: a three-point move in one line halves the equity return. That is the arithmetic of leverage. Yield, funding cost and opex are visible and slow-moving; credit cost is the line the lender does not control and the one a bad year moves first. The sensitivity is linear and steep: each point of credit cost is Rs 8 crore before tax, Rs 6 crore after, three points of ROE.

Post-money book is Rs 200 crore plus Rs 150 crore, Rs 350 crore, so the post-money valuation is Rs 875 crore and the new investor gets 17.1%. That is Rs 725 crore pre-money, 3.62 times today's book and about 25 times trailing profit, and a lender is worth a premium to book only while its ROE beats its cost of equity. On one common framework, price to book is roughly ROE less growth over cost of equity less growth; with an illustrative 15% cost of equity and 10% long-run growth, today's 17.25% ROE supports about 1.45 times book, and 2.5 times needs an ROE near 22.5%, which at today's leverage means a credit cost of about 3.25%. The fresh Rs 150 crore does not change the ratios by itself: at the same three-to-one borrowing, the book can grow to Rs 1,400 crore and profit to Rs 60.4 crore, the same 17.25% ROE on Rs 350 crore. The money buys scale, not a better return; those are the inputs to confirm, not figures to quote.

A clear one, with its risk named. Rinvik is a lender earning a 17.25% ROE with a simple, visible cost structure, and the round is a bet that its credit cost stays near 5% while the book grows into the price; the committee is buying the underwriting, not the yield. The yield of 24% is not the attraction, because the market sets it and a lender that needs 24% is lending to borrowers who have few alternatives. The diligence that decides the case is on the 5%: the vintage-by-vintage loss curves, how the figure held in the last stress, how much of the book is secured, and what the collections team does in month two of a missed payment. At 8% the company is still profitable, with an 8.25% ROE, but it is worth less than book on the same framework and the round would be a down round in waiting. The limitation: cost of equity and long-run growth here are illustrations, and a committee would also stress the funding line, since a lender that loses access to its 11% borrowing has a bigger problem than credit cost.