Case 100Company pitchHard
Explain why a growth fund should invest in Medivrit Labs, a diagnostics chain with 120 collection centres, revenue Rs 420 crore, EBITDA 22% and same-centre growth of 14%. A new centre costs Rs 1.1 crore and reaches Rs 3.5 crore of revenue at 28% EBITDA by year three. The ask is Rs 300 crore for 18%. Build the case on centre economics and an exit at 18x EBITDA in five years.
1The situation
Medivrit Labs runs a diagnostics chain: 120 collection centres feeding blood and other samples to two central labs. Revenue last year was Rs 420 crore, EBITDA 22%, and revenue at centres open more than a year grew 14%. A new centre costs Rs 1.1 crore to open. In the company's data, a new centre earns about Rs 1.5 crore of revenue at a 5% EBITDA margin in year one, Rs 2.6 crore at 18% in year two, and Rs 3.5 crore at 28% from year three. Centre margins are above the company's 22% because central lab and head-office costs sit outside them.
Medivrit asks for Rs 300 crore of new money for 18%, and plans to open 30 centres a year for four years. Your partner wants the investment case built on centre economics, with an exit at 18x EBITDA in year five.
2Your task
Build the case: centre payback, the five-year EBITDA build, the return at 18x, and what has to be true.
Quick check
What multiple of today's EBITDA does the Rs 300 crore for 18% imply?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
A mature centre pays back its Rs 1.1 crore in about 13 months, and that is what makes the Rs 1,667 crore post-money work. Entry is 18x EBITDA, so the return must come from growth: same-centre growth takes EBITDA to Rs 178 crore and 120 new centres add Rs 102 crore, Rs 280 crore by year five. At 18x the fund's 18% is worth Rs 908 crore, 3.03x and a 24.8% IRR.
Step 1Why build a chain's case from one centre?
Before backing a chain of tea shops, you would want to know what one shop costs, how fast it earns that back and whether the hundredth shop does as well as the tenth. For a diagnostics chain the centre is that unit: if a new centre recovers its cost quickly and reliably, every rupee of growth capital compounds; if it does not, opening more centres just spreads the losses. The pitch to a growth fund has to start there, then add the existing business, then the return.
Step 2How quickly does a centre pay back?
At maturity a centre earns Rs 3.5 crore of revenue at a 28% margin, Rs 0.98 crore of EBITDA a year. That recovers the Rs 1.1 crore opening cost in about 13.5 months, a return on capital most retail formats cannot match. Counting the ramp, a new centre earns only Rs 7.5 lakh in year one and Rs 46.8 lakh in year two, so cumulative cash turns positive about 31 months after opening. Both numbers belong in the pitch: the first shows the economics, the second shows how long capital is tied up.
Step 3What does EBITDA look like in year five?
Existing centres: Rs 420 crore growing 14% a year reaches Rs 809 crore, and at 22% that is Rs 177.9 crore of EBITDA. New centres: 30 a year for four years costs Rs 132 crore of the Rs 300 crore. By year five, the 90 centres opened in years one to three are mature and earn Rs 88.2 crore; the 30 opened in year four are in their second year and earn Rs 14.0 crore, Rs 102.2 crore in all. Year-five EBITDA is Rs 280.1 crore, three times today. New centres are held flat after maturity and earn no share of the 14% same-centre growth, which keeps the build conservative.
Step 4What return does the fund earn, and how much comes from new centres?
At 18x, year-five EBITDA of Rs 280.1 crore gives an enterprise value of Rs 5,043 crore. Assume no net debt or surplus cash at exit and no further dilution. The fund's 18% is worth Rs 908 crore, 3.03x its Rs 300 crore, an IRR of 24.8%. New centres supply 36% of that value. Without them, same-centre growth alone gives 1.92x and 14.0%, which is why the centre economics are the heart of the case.
| 0.18 | the fund's stake |
| 18 | exit multiple of EBITDA |
| 280.1 | year-five EBITDA, Rs crore |
| 300 | the fund's investment, Rs crore |
| Case | Year-5 EBITDA, Rs crore | Exit multiple | Money multiple | IRR |
|---|---|---|---|---|
| Base: same-centre growth plus 120 new centres | 280.1 | 18x | 3.03x | 24.8% |
| Exit multiple falls to 14x | 280.1 | 14x | 2.35x | 18.7% |
| No new centres | 177.9 | 18x | 1.92x | 14.0% |
Step 5What has to be true, and what is the view?
Three things. New centres must ramp like the old ones; the newest cohort's year-one and year-two revenue is the first data to ask for. Same-centre growth of 14% must hold for five years, which depends on prices and test mix as much as volume. And central costs must not rise faster than centres; the 22% group margin already absorbs the labs and head office, and 120 more centres will need more of both. My view: invest, because entry at 18x is only paying for today's EBITDA and the case rests on a unit that pays back in about 13 months at maturity. The limit is that the exit multiple is assumed, not known; at 14x the return falls to 18.7%, still positive, which is the margin of safety the centre economics provide.
Where candidates lose it
Candidates value Medivrit on revenue and call 4x cheap for healthcare. The fund is paying 18x EBITDA and exiting at 18x, so the case must show where EBITDA growth comes from, centre by centre.
The second miss is quoting the 14-month mature payback as if new centres earn that from day one. Counting the ramp, cash comes back after about 31 months, and a pitch that hides the ramp loses credibility at the first follow-up.
What the interviewer asks next
- New centres reach only Rs 2.8 crore of revenue at maturity. Redo the year-five EBITDA.
- How would you check that the newest centres are ramping like the oldest?
- Should Medivrit open 50 centres a year instead of 30? What would you need to believe?
- How would net debt at exit change the fund's return?
Asked at General Atlantic, Growth Equity, new york, 2022 (Wall Street Oasis): Explain a company that we should invest in.
Company names and figures are illustrative.