Download - Gitam - Valuation of Equity
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Equity Valuation
What is Value?
Depends on who is asking and why
Generally an economic concept where what a buyer iswilling to pay and what a seller is willing to take overlap
Implies transferabilityImplies agreeable to both parties
In the real world it is normally a range, not a point
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What is a Valuation?
Part art, part science
A process to arrive at an estimate of value for acompany involving:
An analysis of the industry;
An understanding of the historical, current andfuture operations of the company;
An analysis of the financial history andprospects of the company; and
Applying acceptable valuation methods3
Why are Valuations Performed?
Transaction pricing(mergers, acquisitions)
Privatization/postprivatization
Bankruptcy,reorganization and
restructuring Allocation of purchase
Financing
Tax and audit support
ESOPs
Management buyouts Joint venture
investments
price
Litigation
Planning
Value basedmanagement
Other4
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Why Valuation?
Basics of sound investing
Do not buy it for morethan its worth Do not sell it for less
than its worth
Price is what you pay. Value is what you get.--Warren Buffett
Why Valuation?
Valuation plays a key role in many allied areas of finance:
portfolio management sell-offs acqu s ons mergers joint ventures buy-backs
corporate finance
For every complex problem there is a simple solution that is wrong.--G B Shaw
What does accounting track ..
Financial Year
Inflows & Outflows of cash
Consumption of resources & Sales
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End ofearlier
financialyear
Endof this
financialyear
Assets &Liabilities
Assets &Liabilities
Liability
A liability is what a business owes to outsiders. Liabilities financevarious assets
A liability could arise by borrowing money or by acquiring otherresources on credit
Liabilities can be for a Long Term or Short Term
Liabilities are raised according to the end use of those funds
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Liabilities(Sources of Funds)
ShareCapital
Reserves
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& Surplus
Current Liabilities & Provisons
Liabilities to be discharged in the near future
They include credit received from suppliers, short-term bankfinance, advances received from customers, tax dues
Employees also offer short-term credit to their employer. Unpaidsalary would be a part of current liabilities
Provisions are made for any of the foreseen liabilities in currentfuture
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Assets(Application of Funds)
Asset simply means what a business owns. It implies any ownedresource available at the disposal of the firm.
Assets can take physical forms like factory, land, machinery orcapital inventory
Or they can take monetary form such as a bill yet to be paid by aclient, cash, bank balances, deposits with suppliers are all legalclaims which have a value
Some assets are also called as Intangible Assets, these are,Goodwill, Patents, Software, Licenses, Trademarks
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Fixed Assets
Fixed Assets are assets which are acquired for a long-termuse in business
For instance, a machine will be used for a long period of. , .
Fixed Assets form the business infrastructure.
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Current Assets
Current Assets are assets which are acquired not with a view toretain them for a long time but to convert them into a product or aservice or a job or a contract which provides value to a customer
ese rema n proper es o e organ za on or a s or me. erthey are:
Converted to another formSold to a customerConverted into money.
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Examples of Current Assets
Raw Material Inventory
Spares Inventory
Receivables or Debtors or Outstanding
Advances to suppliers
Cash & Bank Balance
Loans & Advances
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Exercise:Identify out of the following items which are current assets& which are fixed assets.
Particulars Identify whether CurrentAsset or Fixed Asset
Balance in Current Account with a bank
Advance aid to a su lier
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Bank balance at a manufacturing location
Bank balance at the head office
Stock of beverages for a hotel
Credit card sales
Bill raised on the customer, not yet paid
Head-office building owned by thecompany
Working Capital
This stands for rolling money which forms a part of the money cycle.It is the most dynamic component of the investment made inbusiness
This amount needs to be invested before customer ultimatel a s
This investment takes the form of various Current Assets,collectively called as Gross Working Capital / Current Assets (CA)
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Man or anizations are strivin to ush net workin
Net Working Capital implies the net funds blocked inCurrent Assets after reducing current liabilities
Net Working Capital / Net CurrentAssets
capital to zero or sub-zero
Thus, they want to finance their investment in workingcapital out of supplier (credit) or customer (advance) funds
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Reserves
Profits earned from business belong to shareholders
However, entire profits may not be distributed due to needssuch as expansion, diversification
These profits accumulate as reserves
Reserves are a liability to shareholders
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Liability of the company to shareholders
Capital + Reserves
Net Worth
Networth of a company is the same as thenetworth of an individual
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Amount of investment in infrastructure + net working capital
Can also be derived by adding the following:
Capital Employed
Long Term Borrowings
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Net Worth & Capital Employed
Based on the following data calculate the net worth &capital employed for a company for the last two years.
Has the financing mix for the company changed?
Rs. Crores 2009 2008Equity Capital 65 65Reserves 422 375
Secured Loans 403 224Unsecured Loans 23 13
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Revenues
Basically sales revenues
Sales revenue from the products and services of the company
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Cost
Compensation (expressed in monetary terms) paid to thesupplier of any service or commodity
What is the difference between cost & price?
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Profit is the difference between Revenue & CostCosts can be defined narrowly or widely to derive different definitions ofprofit
Different Profit Terms:
Net Profit or Profit after Tax (PAT) : All costs reduced
Profit
Profit before Tax (PBT): All costs but tax reduced
Profit before Interest & Tax (PBIT): All costs other than interest
& tax reduced
Profit before Interest, Depreciation & Tax (PBIDT): All costs
other than interest, depreciation & tax reduced (personnel,
operating & other)
Gross Profit (GP): Only material consumed / processed24
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In business, cash surplus is different from profit
Time lags involved in:
Earning of revenue & collecting it
Cash Surplus vs. Profit
Incurring expenses & paying for them
Infrastructure investments involved
Ability to inject funds into the system by raising funds
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Financial statements answers thesequestions ..
FinancialStatement
Nature Focus Key Information
BalanceSheet
PositionStatement
Financial position ona particular date
Composition of assets(resources) & liabilities(sources)
IncomeStatement
Flow Statement Profitability during afinancial period
Revenues & costs
Cash FlowStatement
Flow Statement Cash inflows &outflows during a
financial period
Cash inflows arisingfrom revenue &
liabilities and cashoutflows arising fromcosts & assets
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What do we keep account of?
Income Our charges to customers
Expenses Our costs, consumption of resources
Inflow Inflow of money into the system
Outflow Outflow of money from the system
Assets What we own
Liabilities What we owe to others
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Profit & Loss Statement
Rs. in CroreFirm A Firm B
Revenue (Sales) 200 180CostsOutsourcing 55 25
Food Materials 45 55Manpower Costs 12 18
Maintenance & Depr. 15 14Power & Fuel 8 13Other Overheads 15 15Interest Cost 10 13Profit before taxes 40 27
Profit After Tax 28 19
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Balance Sheet
Rs. in Crore
Liabilities Firm A Firm B Assets Firm A Firm B
Capital 10 20 Fixed Assets 118 112
Reserves 50 40 Inventory 25 65
Bank Borrowing 65 85 Receivables 35 25
Current Liabilities 55 65 Bank Balance 2 8
Total 180 210 Total 180 210
OperatingCash Flow
FinancingCash Flow
InvestingCash Flow
Where is the money coming from & where
is it going ?
Cash Flow Statement
Cash generated inregular course of business net of
taxes and net of increase in
inventories & receivables
Cash received & paid out in raising
money for thebusiness & servicing
previously raisedfunds respectively
Cash paid out inmaking fresh
investments inLong Term Assetsor cash realized
from sale of previous
investments
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Financial management
Key objective:Profit Maximization?Shareholder wealth maximization
Key activity:
Key decision issuesFinancingInvesting
Key focus areas:Monitoring of critical variables impacting businessFinancial controls
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Financial Analysis
Comparison to industry
Provides a measure of the companys financial performanceand condition relative to its peers
Common size (base zero) balance sheets
Common size income statements
Ratio analysis
Other productivity statistics, such as sales/person
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Financial Analysis
Ratio Peculiarities
Highly dependent on underlying accounting assumptions(depreciation method, inventory valuation) in the financials.GIGO!Generally consider book values, not market valuesMostly post-facto, not forward-lookingNo ideal standard figure across all industries, or allcompanies in the same industry
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Financial Analysis
Ratio Peculiarities No ideal standard figure across all industries, or all
companies in the same industry Depend upon relative competitive strength of business in the
industry Depend on nature of industry/business
Seasonality of business Entire production cycle process time FMCG vs Cement vs Breweries
Ideal ratios are rarely static can differ for the same
company/industry, from time to time
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Financial Analysis
Ratio PeculiaritiesFormula for computing a ratio may differ across analysts
o DSCRo Short-term debt
Single ratio cannot be seen in isolationTo be seen in conjunction with other supporting ratios, trendanalysis, peers
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Financial Analysis
Analysis of trends and unusual items
Trend analysis examining changes over timeUnusual items that seem out of place compared to otheryears or industry averages to be discussed in detail
Accounts with unusual titles or those that seem out ofplace compared to the normal business operationsshould be investigated
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Ratio Analysis
Ratio is a meaningful relationship between two financialparameters
Ratios are best interpreted in comparison with:
Historical data
Competition
Industry norms
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Types of Ratios
Liquidity Ratios
Turnover Ratios
Capital Structure Ratios
Profitability Ratios
Earning Ratios
Return on Investments
Market measures
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Liquidity Ratios
Judge firms ability to meet short term obligations
Current Assets
Current Ratio = ---------------------------Current Liabilities
Liquid Assets* Liquid Ratio = ---------------------------
Current Liabilities (normally, Bank OD is excluded)
* Current Assets other than inventories & pre-paids
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Turnover Ratios
Sales Basic Turnover Ratio = ------------------------------
Total AssetsSales
F. Assets Turn. Ratio = --------------------------------Fixed Assets
Cost of Goods Sold Inventory Turn. Ratio= -----------------------------
InventoryCredit Sales
Debtors (Receivables) Turn. Ratio = ----------------------------
Debtors
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Note: when there is one figure coming from P&L and the other from balance sheet,the balance sheet items may be taken as average of opening and closing balances
Capital Structure Ratios
Total Debt Total Debt Equity = ------------------------------------
Total Shareholders Equity
Long Term Debt . = -------------------------------------
Total Shareholders Equity
Earnings Before Interest & Tax Interest Coverage = --------------------------------
Interest CostEBITDA less tax PAT + Interest + Depn
DSCR = ---------------------------- = ---------------------------------Interest + Principal Interest + Principal
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Profitability Ratios
Gross Profit Gross Profit Margin = --------------------------------
Sales
Net Profit or Profit After Tax = ---------------------------------------
Sales
Operating Profit (PBIT) Op. Profit Margin = -----------------------------------
Sales
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Earnings Ratios
Net Profit less Pref. Dividend Earnings Per Share = ----------------------------------------
(EPS) No. of Equity Shares
Total Dividend Dividend Per Share = --------------------------------
(DPS) No. of Equity Shares
DPS Dividend Payout Ratio = -------------
EPS
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Return on Investment
EBITReturn on total assets = ------------------
Total Assets
PAT + Interest ExpensesReturn on total assets (post-tax) = -----------------------------------
Total Assets
PAT + Interest (1 tax)
Net Return on capital employed (post-tax)= --------------------------------Capital Employed
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Market Measures
Earnings Per Share
Earnings Yield = --------------------------------------------Market Price Per Share
Dividend Per Share Dividend Yield = --------------------------------------------
Market Price Per Share
Market Price Per SharePrice Earnings Ratio = ----------------------------------------
(P/E Ratio) Earnings Per Share
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Financial Analysis
Conclusion & key factors to consider
Are any adjustments required to reflect the true earningspotential of the company?
Is the overall trend in the business (revenues, profits,etc.) improving, stable or declining?
Does the company have adequate liquidity? Is workingcapital well-managed?
Is asset utilization acceptable?
Does the company have too much debt? Does thecompany have the ability to borrow in the future if
needed?Are the returns on equity acceptable?
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Financial Analysis
Conclusion & key factors to consider (contd)
How does the company compare with the industry?Your conclusions are a key factor in:
Assessing the risk of investing in the company
Developing forecast assumptions for the company
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Valuation Methodologies
Valuation Methods
Assets Earnings DCF Multiples
Liquidation
Replacemnt
PCEV
Dividend
FCFE
FCFF
Revenues
Earnings
Of two equivalent theories or explanations, all other things being equal, thesimpler one is to be preferred. -William Ockham
Assets
Special
Income Approach
Key inputs to income approach
Required/desired /expected rate of return
Estimates of future cash flow or normalized
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Income Approach
Income approach
Capitalized earnings
Estimate of normalized expected earnings is
growth prospects
Commonly referred to as PECV (Profit EarningsCapitalisation Value) method
Discounted cash flow
Forecasted cash flow available to investors isdiscounted to present value using an appropriate rateof return 52
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Income Approach Discounted Cash Flow
Theoretically correct method
Based on future cash flows
Considers the timing of cash flows
Considers the risk of the cash flows
Potentially dangerous
Reasonable inputs, unreasonable results
Easily manipulatedNot directly linked to market
Typically gives a control value53
Discounted Cash Flow
FORECAST PERIOD TERMINAL PERIOD
COMPONENTS
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Years go through ..n
VALUATION DATE
TERMINAL VALUE
Represents the value of all cash flows beyond
the forecast period
Discounted Cash Flow
EBIT *(1-Tax Rate)(EBIT = Earnings Before
Interest & Taxes)
FREE CASH FLOW=
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Non-cash items (depreciation,Amortization, write-offs)
Incremental workingcapital and
Capex
PLUS
MINUS
Discounted Cash Flow
Free Cash Flows calculationOperating Profit (EBIT)Less: Adjusted Taxes = (Tax paid + saved) = (EBIT * t)
Gives: Net Operating Profit Less Adjusted Taxes(NOPLAT)
Add: Book DepreciationAdd: Non-cash expenses/ amortization
Gives: Gross Cash FlowLess: Increase in net Working CapitalLess: Capital Expenditure
Gives: Free Cash Flows to Firm (FCFF)
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Free Cash Flows calculation
Discounted Cash Flow
A Corporation Ltd.Profitability Statement
Particulars year1 year2 year3
A Corporation Ltd.Statement of Affairs
Particulars year1 year2 year3
Shareholders 1,700 1,900 2,100evenues , , ,
CoGS -750 - 900 -1,050
Cash S G & A -200 - 210 - 220
Depreciation -100 - 120 - 130
Operatg Profit 450 570 700
Less: Interest 100 90 80PBT 350 480 620
Taxes@40% 140 192 248
PAT 210 288 372
Debt-holders 1,400 1,500 1,600
Funds Sourced 3,100 3,400 3,700
Net Block of Assets 2,700 2,900 3,100
Investments 100 100 100
Net Wkg Capital 250 350 450
Cash 50 50 50
Funds Applied 3,100 3,400 3,700
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Free Cash Flows calculation
Discounted Cash Flow
Particulars Year2 year3
Operating Profit 570 700
Less: taxes 40% -228 -280
NOPLAT 342 420
Add: Depreciation 120 130
Add: Non-cash expenses 0 0
Gross Cash Flow 462 550
Less: Increase in W/C -100 -100
Less: Capex -320 -330
Free Cash Flow to the Firm 42 120
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DCF Free Cash Flows
Free Cash Flows to Firm (FCFF)
Not the same as operating CFResidual CF after meeting all cash operatingexpenditure, but prior to any payments to financingstakeholderNet of working capital and capex needed to supportfuture forecast FCFAlways post-taxCash available to all finance providers = Debt cashflow + Equity cash flow
Wed rather be vaguely right than precisely wrong. -J M Keynes
FCFF and FCFE
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DCF WACC
Discounting Factor
Generally, WACC
WACC = [(Kd*D)+(Ke*E)] /(D+E)
o Kd = post-tax cost of debto Ke = cost of equityo D = market value of debto E = market value of equity
Cost of Debt
Kd = Rd (1 Tc)Where
DCF WACC
o = -o Rd = coupon rate of interesto Tc = effective rate of tax paid by firm
E.g. if a firm borrows debt at interest rate of12% and lies in 30% effective tax bracket, itsKd is8.4%. since 12% (1-30%) = 8.4%
Cost of Equity CAPM
Ke = Rf + (Rm Rf)where:
o Ke = cost of equity
DCF WACC
o = -o = risk factor of the cash-flowso Rm = rate of return on a diversified
portfolio (SE benchmark index)
E.g., if the Rf is 6% and the Rm is 10%, theKe of a firm with of 2 is14%. since 6% + 2 (10% - 6%) = 14%
Beta ( )
Measures volatility of firms stock pricerelativeto that of given market index
DCF WACC
,o covariance of selected stock with well-
diversified market portfolio ando the variance of that portfolio
= Covariance of asset with Market/Varianceof the market
Uncertainty is not a result of ignorance or the partiality of human knowledge,but is a characteristic of the world itself. --M Taylor
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Beta ( )
Symbolic representation of riskiness of theunderlying cash flows, vis--vis those of awell diversified portfolio
DCF WACC
market conditionsE.g. if benchmark index moves up by 5% andsimultaneously scrip moves:
o by 7%, its beta is 1.4o by 9%, its beta is -1.8
Beta ( )
In case of calculations based on stock marketdata
DCF WACC
n- evere n us ry segmen average e a sconsideredu = lv / [1+ (D:E)*(1-t)]
Re-levered to target companys target D:Eratiorlv = u * [1+ (Dt:Et)*(1-t)]
Beta is a highly sensitive value driver To be chosen/calculated carefully. Varies with
choice of:market index (for e.g., Sensex, Nifty, BSE200 NSE 100 etc.
DCF WACC
time period covered by underlyingobservational data points (one year, twoyears, five years, etc.)return interval (daily, weekly, monthly, bi-monthly, quarterly, semi-annually, annually,
etc.)
Present Value of FCFs
FCFs are discounted to their present value, using theWACC
DCF Prevent Value of FCF
Free Cash Flows to the Firm 42 140
Present Value Factor @14% 0.77 0.67
PV of the FCFs 32.32 94.50
Sum of the PV FCFs (yr1) 126.81
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DCF Terminal Value
Terminal Value
Business, as a going concern, is assumed tobe carrying on operations in perpetuity, i.e.,infinity
TV is firms value at end of explicit forecastperiod
TV captures firms value for operationsbeyond explicit forecast period
Do not count your chicken before they stopped breeding. --Aesopeus
DCF Terminal Value
Terminal Value
FCFF(n+1)/ (WACC g) where:
FCFF(n+1) = FCFF in year after explicit
FCFF(n+1) = FCFFn * (1+g) g = steady state growth rate of FCF till
infinity E.g., if FCFF for last forecast year is 1000,
WACC is 18% and terminal growth rate is3%, the TV is
6867, being 1000*1.03 / (0.18-0.03)
DCF Terminal Value
Terminal Value
Perpetuity formula does not work where g WACC
-perpetuity implies the business eventuallywould be larger than the whole economy!!
DCF Enterprise/Equity Value
Enterprise ValuePV of FCFs during forecast periodAdd: PV of terminal value
E uit ValueEnterprise valueLess: Net debt, being
o Market value of debto Less: Cash & equivalents
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DCF Enterprise Value
Enterprise Value broad steps in DCF-basedcalculation
Cost of Debt Cost of EquityForecast FCFs
WACCGrowth rate
PV of FCFs
Enterprise Value
Terminal Value
PV of TV
Net Debt Equity value
DCF criticism and defense
DCF is difficult and subjective
So, arent others?
any va ue r vers nee to e com ne to pro uce aDCF valuation
Multiples also consider same factorsDCF focuses on all value drivers rather than combiningthese into one multiple
Markets can remain irrational longer than you can remain solvent. -J M Keynes
DCF requires WACC and nobody seems to have a clueof what it is
Differences in required return is a key factor in
valuation
DCF criticism and defense
DCF is very sensitive to long term growth assumptionsSo are multiples. The problem is mitigated by usingzero value adding long term growth assumptions
Take every gain without remorse for missed profits. --Joseph de la Vega
DCF conclusion
DCF and related techniques are powerful valuation tools
DCF is a very robust methodology, but can only work rightif
the assumptions are reasonablee app ca on s rea s c
Investing should be dull. It shouldn't be exciting. Investing should be more likewatching paint dry or watching grass grow. If you want excitement, take $800
and go to Las Vegas. -Paul Samuelson
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Comparable Multiples
Advantages Disadvantages Easy to understand and
compute Can be used for all
businesses
One key for all locks Ignores the peculiarities
or specialties of targetfirm
vis--vis its peers
Frequently used as asanity check of valuederived from othermethods
Comparable Multiples
Value relative to a key statistic assumed to relate to thatvalue. Key statistics commonly used:
SalesBook Profits (EBIT, EBT, PAT, etc.)Cash Profits (EBITDA, Cash PBT/PAT)Assets (user, capacity unit, customer, etc.)
Valuation based on statistic multiplesP/E, P/BV, P/eyeball, P/customer, P/sales, P/click,P/bed, P/seat, etc..
One of the first questions to ask about a possible investment is 'Why is itmispriced?' If you don't have a reason, there's a good chance it isn't really
mispriced. -- Jeffrey Tannenbaum
EBITDA Margins PAT Margins PE EV/EBITDA
Rs mn MarketPrice MCap FY07 FY08 FY09 FY07 FY08 FY09 FY07 FY08 FY09 FY07 FY08 FY09
A 545 9,367 9.6 9.0 9.5 5.5 6.0 6.1 18.9 17.6 13.6 15.0 13.0 9.6B 133 9,628 23.6 21.3 18.6 9.1 7.5 6.8 30.3 16.3 15.2 17.2 8.4 8.4C 129 27,018 24.1 29.8 25.6 8.2 12.4 11.1 18.2 12.4 12.2 9.6 7.5 7.6
D 405 24,859 15.9 14.5 15.9 6.4 8.9 9.8 27.3 15.5 12.7 13.7 12.3 9.9E 6.8 8.2 11.8 2.6 3.5 6.1
Average 23.7 15.5 13.4 13.9 10.3 8.9
Comparable Multiples
Market Cap(US$ mn)
P/E EV/EBITDA (X)
FY08/CY07 FY09/CY08 FY08/CY07 FY08/CY07
F 1,144.8 8.8 7.4 4.0 3.4
G 386.2 16.0 10.4 8.8 6.6
H 999.5 12.7 10.7 7.7 6.6
I 435.1 13.7 12.3 4.7 4.2
J 121.4 5.9 5.9 4.1 3.2
K 157.1 4.7 3.7 4.1 3.2
Average 10.3 8.4 5.6 4.6
Comparable Multiples
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Comparable MultiplesDate Target Company Bidder Company Seller Company Deal Value
USD(m)Enterprise
ValueUSD(m)
RevenueUSD(m)
RevenueMultiple
EBITDAMultiple
EBITMultiple
PEMultiple
2008Ranbaxy
LaboratoriesLimited (60.62%)
Daiichi Sankyo
Company, Limited
4,625.00 7,622.66 1,213.69 6.28 30.42 34.58 59.78
2008IL&FS InvestsmartLimited (93.21%stake)
HSBC Securitiesand CapitalMarkets (India) PvtLtd.
ETrade MauritiusLimited; IL&FS;Softbank AsiaInfrastructure
306.00 328.23 - NotAvailable
NotAvailable
NotAvailable
23.85
un
2008UTV SoftwareCommunicationsLtd (35.8%)
The Walt DisneyCompany
302.00 844.02 46.74 18.06 103.52 113.57 42.71
2007 New DelhiTelevision Limited(NDTV) (20%stake)
Prannoy Roy;Radhika Roy;RRPR Holdings PvtLtd
140.00 698.29 64.33 10.86 96.57 241.89 201.16
2007India Infoline Ltd
(6.48% stake)
Orient Global 140.00 2,166.90 - Not
Available
71.60 80.75 110.37
2007Infomedia IndiaLimited (formerlyTata infomediaLimited) (40%)
Television EighteenIndia Ltd
ICICI VentureFundsManagementCompany Ltd
45.00 113.03 32.96 3.43 26.98 44.68 131.81
Some Finer Points
Valuation Finer Points Nominal v/s. real cash-flows
Inflation impact Value to be the same under either case
Appropriate capitalization rate Depends on expected return/ beta/ D:E ratio
Tax rate for WACC Marginal rate of tax All differences are timing differences
Target, D:E ratio Target, long-term, future, sustainable ratio Ignore minor variations
Valuation Finer Points Book vs market value of debt
Can impact the value in case the difference in bookand market values is high
Short-term interest costs Two schools of thought (so, whats new??) Adjusted taxes
Impact of MAT/ Deferred taxes Terminal growth rate
A very sensitive value driver Mid-year v/s year-end discounting
Best approximated by mid-year discounting for annualCFs Year-end often used as an approximation
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Valuation Finer Points Sensitivity analysis
Scenarios building
Synergy/ control value Non-core assets Mid- eriod valuations
Adjustment required to valuation at last balance sheetdate to current date
Adjusted Present Value (APV) Value of un-levered firm Add: PV of leverage benefits
Valuation Finer Points Economic Value Added (EVA)
Based on principle that firms profit should reflect allfinancing costs
Surplus value created on firms investment over itscost of capital
More of a management appraisal tool Market Value Added (MVA)
Difference b/w market valuation and book value PV of future expected EVAs
Case Studies
Case Study 1
As an investor you are interested in the emerging marketsof Asia. You are trying to value some stocks in Malaysia,which does not have a long history of financial markets.
During the last three years, the stock market has gone up60% a year, while the government borrowing rate has, .
Would you use this as your risk premium, looking into thefuture?
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Case Study 2
Hitec Inc. has three divisions with the followingcharacteristics
Division Beta Market ValuePCs 1.60 $100 millionSoftware 2.00 $150 million
.
What is the beta of the firm? What would happen to the beta of the firm if it divested
itself of its software business? To value the software business for divestiture, which
beta would you use in your valuation?