AVENDUS CAPITAL SUMMER RECRUITMENT INTERVIEW

QUESTIONS 2014
Recent deals of Avendus:
2015 Deals:
Avendus Capital advises on Tech Mahindras acquisition of the SOFGEN Group
Avendus Capital advises ShopClues.com on its $100 Mn fund raise led by Tiger
Global
2014 Deals:
Avendus Capital provides Fairness Opinion to Kotak Mahindra Bank Ltd, on the
share exchange ratio, in its merger with ING Vysya Bank Ltd. The valuation of the
deal is around Rs.15,000 crore.
Avendus Capital advises Housing.com on its $90 Mn fund raise led by Softbank
Group
Avendus Capital advises Quikr on its $60 Mn fund raise from Tiger Global
Management and current investors
Avendus Capital advises Financial Software and Systems (FSS) on its INR 350
crore fund raise from Premji Invest
Avendus Capital advises BookMyShow on its INR 150 crore fund raise from SAIF
Partners, Accel Partners and Network18
Advisor to Quikr on fund raise from Kinnevik, Swedish investment firm $90 Mn

What does operating leverage mean? (In simple terms) Which company
has higher operating leverage, Ola cabs or Bharti Cements? Why?
A business that has a higher proportion of fixed costs and a lower proportion of
variable costs is said to have used more operating leverage. Those businesses
with lower fixed costs and higher variable costs are said to employ less operating
leverage.
Eg: convenience stores are significantly less leveraged than high-end car
dealerships.
Bharti cements will have higher operating leverage than Ola Cabs. Because, if
sales come down, Bharti will still have to incur the huge fixed costs whereas Ola
would have higher component of variable costs.
The ratio used to measure operating leverage: A type of leverage ratio
summarizing the effect a particular amount of operating leverage has on a
company's earnings before interest and taxes (EBIT). Operating leverage
involves using a large proportion of fixed costs to variable costs in the operations
of the firm. The higher the degree of operating leverage, the more volatile the
EBIT figure will be relative to a given change in sales, all other things remaining
the same. The formula is as follows:

EV/EBITDA?
This ratio is a rough approximation of how valuable a company is relative to its
operational cash flow
EV: Enterprise Value represents the value of the company that is attributable to
all investors;
EBIT (Earnings Before Interest & Taxes): This is the companys Operating Income
from its Income Statement, or Revenue COGS Operating Expenses. This
includes the impact of Depreciation, Amortization, and perhaps other non-cash
charges.
EBITDA: EBIT + Depreciation + Amortization. The idea here is to remove most of
the non-cash charges and make it more accurately reflect cash flow potential.
You may add back other non-cash charges, such as Stock-Based Compensation,
as well.
If the companys EBITDA is $100 million and the median EV / EBITDA multiple of
the set is 10x, then the companys implied valuation based on the median
multiple of the set is $1 billion.
Walk me through how Depreciation going up by $10 would affect the
statements.
Income Statement: Operating Income and Pre-Tax Income would decline by $10
and, assuming a 40% tax rate, Net Income would go down by $6.
Cash Flow Statement: The Net Income at the top goes down by $6, but the $10
Depreciation is a non-cash expense that gets added back, so overall Cash Flow
from Operations goes up by $4. There are no changes elsewhere, so the
overall Net Change in Cash goes up by $4.

Balance Sheet: Plants, Property & Equipment goes down by $10 on the Assets
side because of the Depreciation, and Cash is up by $4 from the changes on
the Cash Flow Statement. Overall, Assets is down by $6. Since Net Income fell
by $6 as well, Shareholders Equity on the Liabilities & Equity side is down by
$6 and both sides of the Balance Sheet balance.

How do you value a company?

Fundamentally, there are only 2 ways to value a company: relative
valuation comparing it to what similar companies are worth and
intrinsic valuation estimating the net present value of its future cash
flows, or estimating how much its Assets are worth, net of Liabilities.

What is WACC?
The weighted average cost of capital is the effective rate of return on the
capital invested in the firm. Capital being in the form of both equity and debt.
This is specific to the risk involved in the company which gets effected by the
financial leverage, operating leverage and many other factors of a company.
Deferred Tax Liability?
The company has paid lower taxes than what it really owes, and needs to
make it up by paying additional taxes to the government in the future.
Free cash flows?
Unlevered FCF = EBIT * (1 Tax Rate) + Non-Cash Charges Change in
Operating Assets and Liabilities CapEx
With Unlevered FCF, youre excluding interest income and expenses, as well as
mandatory debt repayments.
Levered FCF = Net Income + Non-Cash Charges Change in Operating Assets
and Liabilities CapEx Mandatory Repayments
With Levered FCF, youre including interest income, interest expense, and
required principal repayments on the debt.

What are various ratios?

Liquidity ratios:

Solvency ratios:

Inventory Turnover, Receivable turnover, Current ratio, Quick

ratio

Debt-equity ratio, Liabilities-equity ratio, Interest cover

Profitability ratios:

Profit margin, Asset turnover, Return on assets, Leverage, Return

on equity, EPS

Fund raising through Debt and Equity. Pros and Cons?

Answer can be based on WACC curve with respect to Debt/Equity ratio, which
is a result of cumulative effects of cost of debt and cost of equity.
Criteria for making the choice:
1. High EPS
2. High stock price
3. High firm value (low WACC)
Advantages of Debt: Tax benefit, improved managerial discipline
Disadvantages of Debt: Bankruptcy costs, agency costs, low flexibility

Other questions:
Run through a DCF.

How would you value a steel company?

What are the recent deals that happened in steel industry?
How has the deal worked out for the parties? Why did the deal make sense?
(Answer with respect to current steel trade scenario)