valuation concept
TRANSCRIPT
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Basics of valuation
Presented By :Prakash kumar Barnwal
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What we will cover
Purpose of valuation Basic valuation concepts
Methods of valuation critical
appreciation of the methods withsome examples
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Why valuation ?
Do you think the price of stock isreasonable? (equity research-investor)
How much can you sell a
companys shares for? (Capital Markets IPO)
How much should you pay for a
business in an M&A deal?(Assets, shares - IB)
How much can a PE house payfor a business? (IB)
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Valuation concepts
Valuation of Business Vs. Valueof Equity
Value of theoperationalbusiness i.eEnterpriseValue
-
Value ofdebt (less
cash)
bondholder value Value of
Equity
shareholder value
=
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Valuation concepts ..contd.....
The accounting balance sheetCash Operational
Liabilities
Value ofEquity
Operationalassets
Debt
=
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Valuation concepts .. contd
Market value Vs. book ValueCash Operational
Liabilities
Value ofEquity
Operationalassets
Debt
=
Off balance
sheet value
Value ofIntangibles
Many
Industrieshave Marketvalue > bookvalue
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Valuation concepts .. contd
Market value of assets = Marketvalue of liabilities
EquityNetOperationalassets
Net Debt
=
Enterprise value (Markets opinion)
Capital
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Calculation of enterprisevalue
Given Cash = Rs.100, Debt =Rs.600, Equity = Rs.1200 findthe EV?
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Calculation of enterprisevalue
Given Cash = Rs.100, Debt =Rs.600, Equity = Rs.1200 findthe EV?
EV = Rs. 1700 Ie Market value of equity +
value of net debt
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Calculation of enterprisevalue
Given 1200 shares are outstanding at
the valuation date with a share
price of Rs. 15. Market value ofDebt is Rs. 6000, Cash isRs.200. What is EV?
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Calculation of enterprisevalue
Given 1200 shares are outstanding at
the valuation date with a share
price of Rs. 15. Market value ofDebt is Rs. 6000, Cash isRs.200. What is EV?
1200*15 + 6000 200
Rs.23800
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EV of unlisted company
??
Use methods like DCF, multiplesto arrive at EV. Then calculatethe implied share price.
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An Example
EV = 10000, Investments =2000, Cash = 500, Debt = 5000,Number of shares = 200.
What is the share price?
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An Example
Given :EV = 10000, Investments= 2000, Cash = 500, Debt =5000, Number of shares = 200.
What is the share price? (10000 + 2000 + 500 -
5000)/200
Rs. 37.5
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EV Summing it all up
Enterprise value is the marketvalue of net operational assetswhich must equal the marketvalue of net funding THUS :
EV = Equity + Debt - Cash
EV h i
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EV a comprehensive
picture Cash +
Cashequivalents +
Non controlledInvestments +
Non-coreassets +
Enterprisevalue (netoperatingassets)
Debt
PreferenceShares
Minorityinterest
-
Ordinary
Equity value
=
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Concept of trading value Vstransaction value
Trading value is the equity valueof an enterprise without controlie when a small quantity of
shares is bought, IPO, Rightsissue.
Can also be used to value thetotal minority stake in anenterprise
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Concept of trading value Vstransaction value
Transaction value is theenterprise value with control. Egis when there is a buying of
more than 50% of the equity ofthe company.. Takeover etc.
There is a premium involvedwhen there is such a transactionknown as Control premium
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What is control premium?
It is the excess price paid overthe pre-acquisition stock price.
Reasons : synergies perceived,
strategy for future etc.
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Methods for valuation
Multiples based method Discounted Cash flow method
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Multiple based method
Based on linking VALUE with its VALUEDRIVERS ie earnings with value
Cash
Enterprisevalue
Debt
Equity
Interest
income Interestexpense
Net
income
EBIT
EBITDA
Valuation
Value drivers
M lti l G ll
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Multiples : Generally
used Sales : (EV/Sales) Fast
growing, loss makingcompanies
EBITDA : EV/EBITDA where
leverage differs, acqns aregenerating amortizations
EBIT : EV/EBIT where leveragediffers
PE : MPS/EPS for stablecompanies in mature inds. Lev.Is the same
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Multiples : industry wise
Energy : EV/reserves of oil,gas Mining : EV/reserves or
production ton
Media: EV / Subscribers Banks : Price / Book value
Hotels : EV / no. of rooms
Telecom EV/ Subscribers no.
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Discounted cash flow valuation
Valuation method based on theforecast of future cash flows
Advantages are incorporates
the time value of money, cansubject to sensitivity analysis
Useful in valuation of Earlystages companies, projects withfinite lives, valuing divisions ofcompanies, valuing synergies.
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Discounted cash flow valuation
Has helped in identifyingoverheated market or anundervalued market
Independent of accountingassumptions and estimates
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DCF - Disadvantages
Requires a lot of assumptions :Long term growth, discount rate.
Complex and time consuming
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DCF Calculation Steps involved
Forecast the companys free cash flow
Calculate the WACC
Calculate terminal value andDCF
Using the above calculate EV
Convert EV into implied shareprice
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What is Free cash flow ?
Different for different purposes FCF : The cash flow from
operations of the business
available to pay out debt andequity holders after investing forfuture growth. ( ieincrease/decrease in capital
expenditure and working capital)
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Period for forecasting
Period for forecasting must betill the business reaches aSteady state
Steady state is characterized bylow growth rate, ROIC justabove or approximates WACC,and capital investment is low,
company is a cash cow andpays out most of its earnings.
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WACC - Calculation
WACC = Wt. Cost of equity +Wt. cost of debt
Cost of equity is ascertained by
using the CAPM model. Cost of Debt is the post tax cost
of debt
Capital = market value of equity+ market value of debt.
Calculation of Terminal
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Calculation of Terminalvalue
Terminal value is given by : (Steady state FCF) * (1+ g)
(WACC g)
Where g is the long term growthrate into perpetuity.REMEMBER g should not belarger than the nominal GDPgrowth rate.
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To conclude :
Generally using the impliedvalues of shares a value isarrived at which may be medianvalue or wt. avg. etc.
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