VALUATION OF EDELWEISS CAPITAL

SUBMITTED TO: PROF. PARESH SHAH

SUBMITTED BY:PIYUSH GAUR (35)

KOMAL LALWANI (18)NISHIDH SHAH (47)

ANIS VOHRA (56)BHAVIK GANDHI (10)

Edelweiss Capital is a financial services company based in Mumbai, India.

Edelweiss Capital Limited provides investment banking, institutional equities, private client broking, asset management, wealth management, insurance broking and wholesale financing services to corporate, institutional and high net worth individual clients.

It operates from 43 other offices in 19 Indian cities.

EDELWEISS CAPITAL VALUATION

ESTIMATION OF DISCOUNT RATES

` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Secured Loan 99.51 471.85 108.46 127.12 0.93

Unsecured Loan 3496.6 981.56 400.72 975.81 180

Total Debt 3596.11 1453.41 509.18 1102.93 180.93

Interest 300.11 137.22 97.82 77.32 2.13

Tax Rate 0.3 0.3 0.3 0.3 0.3

Cost of Debt (Kd) (%) 5.84 6.61 13.45 4.91 0.82

` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Risk Free Return 0.0675 0.0625 0.0475 0.065 0.075

Return Generated by Market 0.21 0.15 0.27 0.17 0.2

Beta 0.68 1.64 0.95 1.78 1.91

Equity Risk Premium 0.1425 0.0875 0.2225 0.105 0.125

Cost of Equity (%) 9.7575 14.4125 21.185 18.755 23.95

COST OF DEBT

COST OF EQUITY

COST OF CAPITAL` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Market Price Per Share 32.1 50.97 41.32 56.91 63

Number of Shares 75.2 37.54 37.47 37.47 4.49

Market Value of Share 2413.92 1913.414 1548.26 2132.418 282.87

Total Debt 3596.11 1453.41 509.18 1102.93 180.93

Total 6010.03 3366.824 2057.44 3235.348 463.8

Cost of Debt 5.84 6.61 13.45 4.91 0.82

Cost of Equity 9.7575 14.4125 21.185 18.755 23.95

Cost of Capital (%) 8.18 9.98 15.36 9.63 9.85

Cost of Capital can be calculated by:

(Market Value of Debt * Cost of Debt) + (Market Value of Equity * Cost of Equity) Total Debt and Equity

NET INCOME APPROACH

Approach proposed by David Durand, there exists direct relationship between the Capital Structure and Valuation of the Firm and Cost Capital.

V = S + B

Overall Cost of Capital = EBIT / V

ASSUMPTIONS TO NI APPROACH

There is no Corporate Taxation.The cost of debt is less than the cost of

equity. The use of debt does not change the risk

perception of the investors as a result of both cost of debt and cost of equity remain constant.

No hidden Cost exist, when more and more debt introduced.

NET INCOME APPROACHRs. in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Market Price Per Share 32.1 50.97 41.32 56.91 60

Number of Shares 75.2 37.54 37.47 37.47 4.49

Total Debt 3596.11 1453.41 509.18 1102.93 180.93

EBIT 363.91 181.25 133.27 117.97 39.66

Interest 300.11 137.22 97.82 77.32 2.13

Net Income 63.8 44.03 35.45 40.65 37.53

Equity Capital Rate 9.76 14.41 21.19 18.76 23.95Market Value of Equity Shares 653.86 305.50 167.34 216.74 156.70

Total Value of Company 4249.97 1758.91 676.52 1319.67 337.63

Overall Cost of Capital (%) 8.56 10.30 19.70 8.94 11.75

Increase in Debt has cause to Decrease in cost of capital and value of Edelweiss Capital.

Rate of Interest is less than Equity Capitalization Rate.

NET OPERATING APPROACH

Approach proposed by David Durand, the valuation of the firm and its Cost of Capital are Independent of its Capital Structure.

The Market Value of debt is deducted from the total value of the firm and the difference is the Market Value of Stock.

ASSUMPTIONS TO NOI APPROACH

The overall Cost of Capital remains same for all degree of debt equity mix.

The Market Capitalization Rate capitalizes the Value of Firm as a whole.

The use of less costly debt funds increases the risk of Shareholders.

There are no Corporate Taxes. The Cost of Debt is constant.

NET OPERATING APPROACH` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Number of Shares 75.2 37.54 37.47 37.47 4.49

Total Debt 3596.11 1453.41 509.18 1102.93 180.93

Cost of Capital (%) 8.18 9.98 15.36 9.63 9.85

EBIT 363.91 181.25 133.27 117.97 39.66

Total Value of Company 4446.19 1816.57 867.49 1225.28 402.82

Market Value of total Debt 3596.11 1453.41 509.18 1102.93 180.93

Market Value of Equity Shares 850.08 363.16 358.31 122.35 221.89

Interest 300.11 137.22 97.82 77.32 2.13

Equity Capitalization Rate 7.51 12.12 9.89 33.22 16.91

The market value of the firm remains unaffected by the change in capital structure.

However, the with the increase in debt over previous years has increased the equity capitalization rate and value of Edelweiss Capital over a period of time.

TRADITIONAL APPROACH

The traditional approach is also known as the intermediate approach as it is the mean between two extreme approaches of net income approach on one hand and net operating income on the another.

It believes in the existence of what may be called Optimal Capital Structure.

By a judicious mix of debt and equity capital, it is possible for the firm to minimize the overall cost of capital and maximize the total value of the firm.

TRADITIONAL APPROACH

` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

EBIT 363.91 181.25 133.27 117.97 39.66

Interest 300.11 137.22 97.82 77.32 2.13

Net Income 63.8 44.03 35.45 40.65 37.53

Cost of Equity (%) 9.7575 14.4125 21.185 18.755 23.95

Equity Shares 653.86 305.50 167.34 216.74 156.70

Market Value of Debt 3596.11 1453.41 509.18 1102.93 180.93

Market Value of Company 4249.97 1758.91 676.52 1319.67 337.63

Overall Cost of Capital (%) 8.56 10.30 19.70 8.94 11.75

Reduction in Interest rate is higher than reduction in cost of equity.

In Year 2008-09, Increase in Interest Rate was higher than Increase in Cost of Equity.

MODIGLIANI-MILLER APPROACH

the value of the firm and its cost of capital independent of its capital structure, i.e., the total value of the firm remain unchanged inspite of the debt equity mix or the degree of leverage.

overall cost of capital is equal to the capitalization rate of pure equity stream of risk class.

MODIGLIANI-MILLER APPROACH

` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Total Capital Employed 4919.12 2763.55 1865.29 2453.29 631.05

Equity Capital 1323.01 1310.14 1356.11 1350.36 450.12

Total Debt 3596.11 1453.41 509.18 1102.93 180.93

Net Operating Income 363.91 181.25 133.27 117.97 39.66

Interest 300.11 137.22 97.82 77.32 2.13

Market Value of Debt 3596.11 1453.41 509.18 1102.93 180.93

Equity Earnings 63.8 44.03 35.45 40.65 37.53

Cost of Capital (%) 8.18 9.98 15.36 9.63 9.85

Market Value of Equity 779.50 441.29 230.75 422.21 381.19

Market Value of Company 4375.61 1894.70 739.93 1525.14 562.12

Average Cost of Capital (%) 8.32 9.57 18.01 7.74 7.06

At any degree of leverage, the company's overall cost of capital (ko) and the Value of the firm (V) remains constant.

This means that it is independent of the capital structure. The value of Edelweiss Capital is obtained by capitalizing the operating

earnings, discounted at an appropriate discount rate suitable for the risk undertaken.

NET ASSETS VALUE METHOD

Net Assets Value = Total Assets (excluding Miscellaneous Expenditure & Debit balance of Profit & Loss account) – Total Liabilities

OR

Net Assets Value = Share Capital + Reserves (excluding revaluation reserves) — Miscellaneous Expenditure – Debit Balance of Profit & Loss Account

NET ASSET VALUE METHOD` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Fixed Assets 3.75 3.1 4.6 7.68 1.29

Investments 1199.52 1153.61 1249.73 1059.23 247.93

Current Assets, Loans & Advances 3828.92 1786.22 682.81 1464.13 403.09

Total Assets 5032.19 2942.93 1937.14 2531.04 652.31

Current Liabilities 76.97 98.68 34.22 61.18 21.9

Provisions 36.09 80.71 39.38 18.18 0.31

Current Liabilities & Provisions 113.06 179.39 73.6 79.36 22.21

Unsecured Debt 3596.11 1453.41 509.18 1102.93 180.93

Total Debt 3709.17 1632.8 582.78 1182.29 203.14

Net Worth 1323.02 1310.13 1354.36 1348.75 449.17

Number of Equity Share 75.2 37.54 37.47 37.47 4.49

Value Per Share 17.59 34.90 36.15 36.00 100.04

PROFIT EARNING CAPOTALIZATION VALUE METHOD

PECV = Future Maintainable Profits After Tax/Capitalization Rate OR

PECV = Future Maintainable Profits After Tax* PE Multiple

PROFIT EARNING CAPITALIZATION VALUE METHOD

` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Revenue 439.61 233.53 189.88 187.65 75.31

Expenditure 75.7 52.28 56.61 69.68 35.65

PBDIT 363.91 181.25 133.27 117.97 39.66

Interest 300.11 137.22 97.82 77.32 2.13

PBDT 63.8 44.03 35.45 40.65 37.53

Depreciation 1.42 1.67 4.38 1.32 1.02

PBT 62.38 42.36 31.07 39.33 36.51

Tax 3.65 8.14 4.71 10.54 9.44

PAT 58.73 34.22 26.36 28.79 27.07

PE Ratio 10.70 15.00 10.40 19.10 9.95

PECV 628.4 513.3 274.1 549.9 269.4

EPS 0.78 4.56 3.52 3.84 6.03

Market Price of Equity 32.1 50.97 41.32 56.91 60

EBITDA MULTIPLE METHOD

Enterprise Value

 

Market Value of Equity + Market Value of Debt

Earnings before Interest, Taxes, Depreciation & Amortization

EBITDA MULTIPLE METHOD` in Crores 2010-11 2009-10 2008-09 2007-08 2006-07

Number of Shares 75.2 37.54 37.47 37.47 4.49

Market Price of Equity 32.1 50.97 41.32 56.91 60

Market Value of Equity 2413.92 1913.414 1548.26 2132.418 269.4

Market Value of Debt 3596.11 1453.41 509.18 1102.93 180.93

Enterprise Value 6010.03 3366.82 2057.44 3235.35 450.33

EBITDA 363.91 181.25 133.27 117.97 39.66

Cost of Capital (%) 16.52 18.58 15.44 27.43 11.35

MATRIX Rs. In Cores

Methods 2010-11 2009-10 2008-09 2007-08 2006-07

Net Income Approach 4249.97 1758.91 676.52 1319.67 337.63

Net Operating Approach 4446.19 1257.59 629.08 629.01 165.59

Traditional Approach 4249.97 1758.91 676.52 1319.67 337.63

Modigliani-Miller Approach 4375.61 1894.70 739.93 1525.14 562.12

NI Approach is based on income before interest. NOI Approach is based on income after interest. Traditional Approach takes into account only equity capitalization rate. M&M Approach takes in to account overall capitalization rate.

CONCLUSION

Net Operating Income Approach is the best method for Valuation of Edelweiss Capital.

It takes into account both i.e., Capitalization Rate and Interest.

There are always fluctuations in the Interest Rate and Cost of Fluctuations.

Net Worth is increasing, which indicates that company’s Assets increasing at faster rate than Debt.

Edelweiss Capital has a value of almost of ` 4200 Crores. Company has good profitability ratios which indicates

sound management exist at Edelweiss Capital.