CREDIT SERIES- Numbers are numbers

Case I- Compare peer profitability and understand  leverage

  • This was one of the key auto ancillary player. Fantastic profitability and excellent rating. I was doing a research on the margins across the value chain in this industry few years back. Even the most niche and sophisticated product in auto ancillary chain was not making the kind of EBIDTA margins which this company was making.
  • There were other customers also doing similar business but the margins declared by them was less than one-third of what it was showing consistently.
  • And the international operations and acquisitions of businesses in domestic and overseas locations was quite a frequent phenomenon.
  • The catch was the rising pile of debt and the ever continuing double digit margins in a low value add business.
  • Numbers looked something like this-

table

  • Finally the story had to end. Margins, sales started crumbling on one side and repayment obligations & debt piling on other side. Refinancing and new borrowings stopped.
  • What’s important to appreciate is that debt has to be looked not just as a debt/equity ratio, but as sales to debt as well.
  • The business is today looking for buyers which can make use of some of the good factories it had created. If it was not for these facilities and the employment opportunity, it would have been cast in history by now.

 

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