Where three to eight percent of EBITDA hides in capex-heavy businesses.

Every CFO of a capex-heavy business has, at some point, been told that the operation is “already lean.” The factory is running. The mall is full. The cinema seats are filling. The receivables are healthy. And yet the EBITDA margin stubbornly fails to expand at the rate the board has been promised.

Over more than two decades of internal audit and cost work — at ABB across Asia, the Middle East and Africa, and now in independent practice for Indian listed groups and multinationals operating here — I have come to a firm view. In capex-heavy businesses, there is almost always three to eight percent of EBITDA hiding in places the operating team is not looking. Sometimes more.

The reason it remains hidden is not incompetence on the part of management. It is that the categories where the margin sits are the ones that operational teams are structurally not incentivised to interrogate. The CFO trusts them. The auditor signs off on them. They sit, quarter after quarter, paid in full.

What follows is the framework I work from when a board or a CFO asks the firm to look. Five categories. In capex-heavy operations — organised retail, malls and multiplexes, manufacturing, and process industries — one or more of them is almost always carrying material recoverable value.

1 · Indirect-cost rationalisation

The largest and most universally underexplored category.

In most capex-heavy businesses, direct cost is watched closely. The cost of steel for the manufacturer, the rent for the multiplex, the cost of goods for the apparel retailer — these are the lines the CFO has on a dashboard. They are governed, contested, and renegotiated on cycle.

Indirect cost is not. Repairs and maintenance, travel, professional fees, security, housekeeping, utilities, communications, IT licences, miscellaneous administrative overhead — these are typically aggregated, approved by category, and accepted because no single line is large enough to attract scrutiny. The CFO sees the total. The total grows in line with the business, more or less. The line items inside it are rarely opened.

When the firm opens that envelope on a serious engagement, three patterns recur. First, contract drift — vendors who were appointed five years ago at a competitive rate, now billing thirty to forty percent above the current market without anyone noticing. Second, scope creep — the housekeeping contract that began at one site and quietly expanded to twelve, never re-tendered. Third, duplication — two separate departments paying two separate vendors for overlapping services, because the procurement systems do not talk to each other.

A disciplined indirect-cost review on a mid-cap capex-heavy business will typically surface one to two percent of revenue in recoverable run-rate savings, sometimes more. None of it requires touching the customer experience. None of it requires touching the people line. It requires only that someone open the envelope and read what is in it.

2 · Costing-model rigour

Moving from thumb-rule pricing to true-cost recovery.

This is a category that applies most directly to manufacturers and B2B service businesses, though variations apply to mall operators and multi-format retailers as well. The question it answers is deceptively simple: do you actually know what each unit of what you sell costs you to produce or deliver?

In one engagement that has stayed with me from earlier in my career, I worked with a Tier-1 auto-component manufacturer that bid for customer orders using a costing thumb-rule the founder had developed two decades earlier. The rule was applied uniformly across hundreds of component variants. It produced bids that won business at scale. It also produced a portfolio in which roughly forty percent of the variants were being sold below true cost — with the loss invisibly subsidised by the high-margin variants in the same portfolio.

When the firm rebuilt the costing model from first principles — tracing material, machining time, indirect overhead, and warranty cost to each variant — the picture changed entirely. Some bids were repriced. Some variants were quietly retired from the catalogue. The relationships with the customers most exposed to the repricing were managed carefully. The recovery to margin, within a year, was material.

Every capex-heavy business that sells multiple SKUs or services from a shared cost base has some version of this problem. Mall operators bundling parking, common-area maintenance, and tenant services into a single rent figure. Multiplexes pricing F&B and ticketing without distinguishing the contribution of each. Apparel retailers pricing categories on category-margin assumptions inherited from the time the brand was launched. The work is unglamorous. The recovery is real.

3 · Indirect-tax recovery and structuring

GST input credit, customs duty, and the cost of compliance fatigue.

Of the five categories in this framework, this is the one where the recovery is most often measurable to the rupee — and the one where mid-cap CFOs are most often surprised by what is sitting unrecovered.

The pattern is consistent across capex-heavy businesses. Input tax credit on vendor invoices is being lost at the GSTR-2A reconciliation stage because vendor compliance is uneven and the internal team has neither the bandwidth nor the system to chase. Capital-goods GST credit is being deferred or written off because the documentation trail is incomplete. Reverse-charge mechanism compliance is being applied conservatively rather than correctly. Customs duty and additional-cess optimisation under FTPs and SEZ regimes is being left to the customs broker, who optimises for clearance speed, not for landed cost.

None of this is illegal optimisation. It is the proper recovery of credits and exemptions that the law explicitly permits. The reason it goes unrecovered is procedural — the systems and the discipline required to capture it consistently do not exist in most mid-cap operations. They can be built. They are worth building.

I would caution against the temptation to treat this as a one-time clean-up exercise. The recovery is run-rate, not one-shot. A disciplined GST and indirect-tax practice, embedded in the monthly close, will surface fifty to one hundred and fifty basis points of margin annually for many capex-heavy businesses — and a defensible position should the tax authorities call for a review.

4 · Process re-engineering

The savings that come from removing steps, not adding controls.

Most internal audit reports recommend the addition of controls. Most internal audit reports are, in this respect, looking in the wrong direction. In capex-heavy businesses with operational maturity, the recoverable margin is more often in removing process steps that no longer serve a purpose than in adding ones that do.

The reason these steps exist is institutional memory. A reconciliation that was added because of a one-time incident in 2015 is still being performed by three people every month, eleven years later. An approval matrix that required four signatures when the company turned over two hundred crore still requires four signatures at four thousand crore. A physical inventory verification cycle that made sense when stock was held at six locations now runs across sixty — with no commensurate adjustment to the methodology, the sample size, or the time it consumes.

Earlier in my career, I worked on the audit of a BPO operation where the transport billing reconciliation was consuming significant team capacity every month. The process had been designed at a scale and complexity that no longer existed in the current operating model. We did not improve the reconciliation. We removed it, designed an automated control to replace its substantive function, and released the people to higher-value work. The recovery showed up in two places — in headcount efficiency and in the speed of the monthly close.

A process re-engineering exercise on a mid-cap capex-heavy business will typically identify between twenty and forty percent of non-customer-facing process steps as candidates for removal, automation, or consolidation. Done properly, with the right controls retained, this produces savings that endure — and a finance and operations team that is meaningfully less fatigued.

5 · Vendor and contract economics

What proper due diligence and renegotiation unlock.

Capex-heavy businesses spend a great deal of money with a relatively small number of large vendors — technology suppliers, equipment OEMs, facilities-management firms, logistics providers, marketing agencies, professional services firms. The terms of those contracts, in many cases, were negotiated under conditions that no longer prevail.

Three patterns to watch for. First, escalation clauses that compound annually and have, over five or seven years, taken the contracted rate well above what the same vendor would quote a new client today. Second, related-party arrangements that have crept into the vendor base without proper disclosure or arm’s-length pricing — a category where forensic discipline is essential and where the recoverable value is often considerable. Third, scope-and-rate misalignment — a contract that was scoped for a level of service the business no longer requires, still being paid in full because no one has gone back to renegotiate.

Vendor due diligence done seriously — with the rigour that a forensic-trained practice brings to it — surfaces all three. The renegotiation that follows is a normal commercial exercise, properly framed: not an adversarial contest, but a re-pricing to current market conditions, with the relationship preserved.

In one engagement on a listed multiplex group, a proper interrogation of the vendor base across food service, housekeeping, IT, and projects produced renegotiated terms across roughly a third of the contracts in scope. The savings ran into single-digit crores annually, run-rate, against a one-time engagement cost that was a small fraction of that figure. None of the relationships were broken. Several were strengthened.

How a CFO should sequence the work.

If a CFO of a capex-heavy business reads this and recognises one or two of the categories above, the natural question is which to address first.

My recommendation, after many engagements of this kind, is to begin with category three — indirect-tax recovery. The reason is not that it is the largest. The reason is that the recovery is the most quickly measurable, the least operationally disruptive, and the most defensible to the audit committee. It also produces a finding within four to six weeks, which builds confidence for the broader work.

From there, category one — indirect-cost rationalisation — is typically the next priority. It is the largest in absolute terms in most businesses, and the methodology is well-established. Categories two, four, and five take longer to execute properly and are best sequenced into a twelve-to-eighteen-month programme rather than attempted in parallel.

The cumulative effect, done with discipline, is the three to eight percent of EBITDA that the title of this article promises. In some businesses, materially more. The recovery does not require a reorganisation. It does not require headcount reduction. It does not require any change the customer or the operating team will feel. It requires only that the firm doing the work has the methodology, the seniority, and the willingness to look carefully at the categories that no one else is looking at.

That, in a sentence, is the work the firm does.