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VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
The Board of Directors
Omshakthy Agencies ( Madras ) Private Limited.,
Chennai – 600 032.
Dear Sir,
Sub: Valuation analysis of the enterprise of Omshakthy FIRE Realty Private Limited as per DFCF Methodology.
We refer to our engagement letter dated 27th May 2014 given by OM Shakthy Agencies ( Madras)
Private Ltd requesting us to carry out the Valuation of Enterprise of Omshakthy Fire Realty
Private Limited . In accordance with the terms of the engagement, we are enclosing our report
along with this letter. In attached report, we have summarized our Valuation Analysis of the
Company as at 31 s t March, 2014 together with the description of methodologies used and
limitation on our Scope of Work. This Valuation Analysis is confidential and has been prepared
exclusively for the Management of Company. It should not be used, reproduced or circulated to
any other person, in whole or in part, without the prior consent of V Narayanan & Co. Such consent
will only be given after full consideration of the circumstances at the time. We are aware that the
conclusion in this report may be used for the purpose of certain statutory disclosure by Company
and we provide consent for the same. Trust the above meets your requirements.
Please feel free to contact us in case you require any additional information or clarifications.
Yours Faithfully,For and on behalf of
V NARAYANAN & CO.,
Chartered Accountants
Partner
Date: June 4, 2014
Place: Chennai
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 1
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Contents Page No
Executive Summary -------------------------------------------------------------------------- 3
Purpose of Valuation ------------------------------------------------------------ ------------ 4
Industry Assessment ------------------------------------------------------------ ------------ 5
Company Assessment ----------------------------------------------------------- ------------ 6 to 10
Inventory Assessment----------------------------------------------------------------------- 11 & 12
Valuation methodology, Approach and analysis ----------------------------------------- 13 to 15
Caveats ------------------------------------------------------------------------------ ------------ 16 & 17
Annexure: Projected Financials & Valuation
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 2
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Omshakthy Agencies Limited has entered into a Equity Joint Venture Partnership with one of the leading
Private Equity Funds viz, FIRE CAPITAL INVESTMENTS MAURITIUS PRIVATE LIMITED and formed a special
purpose vehicle with 50% equity. Through the SPV, a gated community residential layout is being
developed within the CMDA limits of Chennai spread over 40 Acres, at an estimated size of Rs.200 Cr.
The project launch commenced in July-2012. Response from Customers has been very encouraging. The
SPV will be wound up once the Project is completed and the surplus will be shared between the
Promoters. This project will get completed in the next 1 to 2 years.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 3
Executive SummaryExecutive Summary
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
The Purpose of valuation is to value the Enterprise as at 01.04.2014 in order to arrive fair value so that
one segment of the share holders can buy the equity of the other segment of the shareholder.
Scope of services
This valuation report has been prepared by M/s V Narayanan & Co., Chartered Accountants, to
determine the fair value of enterprise of Company in accordance with the Hybrid Method using
both Discounted Free Cash Flow Methodology and estimating the residual value of the inventory as
on the date of valuation.
The valuation exercise was carried out under the following limitations:
1. The Valuation analysis of enterprise is based upon the future projections of company provided
to us, which is based upon various assumptions made by Company relating to the operations
of its business and any change in the assumptions may have an impact on the conclusion of
this report.
2. We have not made an appraisal or independent valuation of any of the assets or liabilities of
the Company and have not conducted an audit or due diligence or reviewed / validated the
financial data provided by the management.
3. The scope of our work has been limited both in terms of the areas of the business and operations
which we have reviewed and the extent to which we have reviewed them. There may be matters,
other than those noted in this Report, which might be relevant in the context of the transaction and
which a wider scope might uncover.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 4
Purpose of ValuationPurpose of Valuation
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Real estate industry in India is currently estimated to be $16 billion with a CAGR of 30%. In this sector is
driven primarily by IT/ITeS, growing presence of foreign businesses in India, the globalization of Indian
corporate and rapidly increasing consumer class.
As real estate construction and values have expanded in India — buoyed by healthy economic growth,
and coupled with a series of IPOs by property firms — so in recent years has India's property sector
changed substantially. These trends of growth and modernisation are set to continue, with some market
participants forecasting that real estate development in India will grow from US$12 billion in 2005 to
US$90 billion by 2015.
Real Estate sector forms an important place in the Indian economy with a GDP contribution of
approximately 5-6%.
Growth Drivers
1. Rapid urbanization : Urban population expected to touch 590 million by 20302. Decreasing Household size: Average H/h size fell from 5.4 in 1981 to 5.1 in 20003. Increasing working age population (Almost 64% in 16-64 age group)4. Increasing income levels: Average salary levels increased by 13.5% in 20055. Easier access to mortgage, long tenure loans and tax incentives6. Market structure is highly fragmented and unorganized7. Regional players are expanding to achieve a Pan-India presence
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 5
Industry AssessmentIndustry Assessment
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 6
Company AssessmentCompany Assessment
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
About the city
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 7
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Chennai is the capital city of Tamil Nadu. It is a major commercial, cultural, economic andeducational center in South India.
Known as the Detroit of Asia , it accounts for over 60% of the country’s automobile exports. The city is India’s second largest exporter of software, Information Technology (IT) and Information Technology – Enabled Services (ITES),next to Banglore. By the 2011 census, the city had 4.68 million residents making it the sixth most populous city in
India. It is ranked 4th in hosting the maximum number of Fortune 500 companies of India , next only to
Mumbai , Delhi and Kolkata. Chennai’s economic development has been closely tied to its port and transport infrastructure. The city is served by two major ports namely Chennai Port (one of the largest artificial ports and
Ennore Port. The Chennai port is India’s second busiest container hub after Mumbai. As the entertainment Capital of South ,it is also home to the large South Indian Tamil film
Industry. The Sate Govt of TamilNadu ,after successfully establishing IT and Industrial Parks , is in the
process of setting up Financial investment of over USD2.5 Billion.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 8
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Major Infrastructure Initiatives in the City
The residential real estate market of Chennai has witnessed significant improvement in termsof buyer interest, which has translated into higher transactions over the last one year. Grand Southern Trunk (GST) Road, Sriperumpudur and Porur have witnessed significant increase in terms of inquiries and conversions over the previous year.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 9
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Capital Structure
The capital structure of the company as on 31/03/2014 is as under (provisional)
Particulars Amount in Lacs 31/03/2014 Authorized(Equity share of Rs. 10 each with voting rights) 2.00 (Optionally Convertible Redeemable Preference shares of Rs.10 each) 4998.00 Issued, subscribed and paid up(18,300 equity shares of Rs.10 each fully paid up with voting rights) 18.30 (2,00,00,000 Optionally Convertible Redeemable Preference shares of Rs.10 each fully paid up 2000.00 Total 2018.30
Historical income statement Amount in Lacs
Provisional AuditedParticulars 2013-14 2012-13 2011-12 EBITD 1903.88 3843.84 (51.90) Finance cost - - - Depreciation 0.52 0.87 1.34 Profit Before Tax 1903.358 3842.97 (53.24) Provision For Taxes 646.95 1230.05 0.03 Profit After Tax 1256.31 2612.92 (53.28)
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 10
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Historical Balance Sheet Amount in Lacs
Provisional Audited Particulars 2013-14 2012-13 2011-12
Sources of funds Share holders funds 4989.42 5774.92 4986.00 Secured Loans - - - Unsecured Loans - - - Deferred tax liability 0.61 0.53 0.68 Total 4990.03 5775.44 4986.68 Application of funds Net Fixed assets 4.06 4.31 5.18 Net Current assets 4985.97 5771.13 4981.50 Total 4990.03 5775.44 4986.68
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 11
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Omshakthy Fire Realty Private Limited has developed a residential gated community “Kanopus”of well demarcated plots ranging from 450 sq.ft to 4000 sq.ft at Paruthipattu measuring at about 40.67 acres strategically located at 120 ft Poonamalle – Avadi State Highway No.55 and having close proximity to Avadi and Ambattur Bus Stand and Railway Station.
The Company has been selling the residential plots at its gated community and proposes to complete the entire sale of the plots by June, 2015.
The value of the undeveloped land at measuring about 34.20 acres has been determined at Rs.75 lacs per acre being the realistic value of the plot as at March, 2014 , considering that inventory of the land parcel is not contiguous , thus the total value of the inventory is estimated at Rs.2565 lacs.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 12
Inventory AssessmentInventory Assessment
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 13
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Valuation of the enterprise of the company has been done, by adopting the Hybrid method using
Discounted Free Cash Flow (DFCF) Method inrespect of ongoing projects of the company, as well as
considering the realistic estimate in respect of the inventories representing undeveloped land owned by
the company.
Finance theory recognizes four basic methods of valuation of shares, with many of its deviants being in
vogue in practice. These methods are:
i) Net Assets Value (NAV) method
ii) Profit Earnings Capacity Value (PECV) method
iii) Discounted Free Cash Flow (DFCF) method
iv) Market Approach (MA) method
NAV method: The NAV is the total value of a company's assets less the total value of its liabilities. If the
NAV is divided by the number of shares, it gives the net assets per share. This is the value of the assets
that belong to each share.
Evidently, NAV method is based on historical costs of the assets as reflected in the Books of accounts. In
the absence of any revaluation of fixed assets, the balance sheet values of assets may be far divorced
from the current market price of the assets
PECV method The PECV is to be calculated by capitalizing the average of the after tax profits for the
preceding three years at specified capitalization rates and dividing the resultant figure by the number of
shares. The capitalization rates will be different for different industries, different functions like trading/
manufacturing and the standing of the shares in the market.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 14
Valuation methodology, Approach and analysisValuation methodology, Approach and analysis
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
DFCF Method DFCF valuation method is a popular method for valuation of shares, used widely by stock
analysts, worldwide. The main idea behind this method is that “a stock's worth is equal to the present
value of all its estimated future cash flow. DFCF method defines the value of the company as the
present value of the company’s future free cash flows (FCF), discounted at the weighted average cost of
capital (WACC), plus the company’s initial cash/ marketable securities. It uses discounted cash flow
valuation to get the fair value of the company based on the projections of how much money will the
company generate to investors in the future. It involves estimating the future free cash flows and
discounting them at a particular discount rate.
DCF uses the concept of time value of money. All future cash flows are estimated and discounted, at an
appropriate rate, to give their present values. The sum of all future cash flows, both incoming and
outgoing, is the Net Present Value (NPV), which is taken as the value or price of the cash flows.
Since valuation is essentially a forward looking exercise, DFCF is one of the most acceptable valuation
method used by Business valuers worldwide.
Market Approach Method In this method, the Historical EPS and Book Value as per latest balance sheet
are respectively multiplied by average PE and BV multiple of BSE 100 Index respectively. A fixed discount
of 40% is to be then applied. Higher of the two valuations is chosen.
This method takes into account both the historical value of assets and the earnings and brings in an
element of market situations also.
Each of these methods has their advantages and disadvantages and are used under different
circumstances, in tune with their characteristics. It would be naive to say one method is absolutely
better than the other. One method may be suitable for a particular circumstance while the other will be
preferred under different circumstances.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 15
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
Valuation How Done
Since the purpose of valuation was to arrive fair value of the enterprise in order to arrive buyout of
either of the segment of the shareholders from the corresponding segment, we have proceeded to
value the enterprise based on availability of free cash flow from the ongoing activity together with
estimating the value of the unsold inventory .
Basis of Discounted Free Cash Flow Method (DFCF)
The DFCF to equity method expresses the present value of the business as a function of its future
cash earnings capacity. This methodology works on the premise that the value of a business is
measured in terms of future cash flow streams, discounted to the present time at an appropriate
discount rate (Cost of Equity (KE)). The value of the business is arrived at by estimating the Free Cash
Flows (FCF) to equity and discounting the same at the KE. This is estimated by forecasting the free cash
flows available for the company (which are derived on the basis of likely future earnings of the
companies) and discounting these cash flows to their present value at the KE. The DFCF methodology
is considered to be the most appropriate basis for determining the earning capability of a business.
It expresses the value of a business as a function of expected future cash earnings in present
value terms. The approach seeks to measure the intrinsic ability of the business to generate cash.
For the purpose of valuation of enterprise in this transaction through DFCF methodology, we have
relied upon the projections provided by the management for the year ending March 31 s t 2015 and
June 30 t h 2015, duly supplemented by discussions held with the management. The Cost of Equity has
been determined at 11.72 per cent as per CAPM model.
Based on our Analysis of the Company and subject to our caveats as further detailed in this report,
the fair value of the enterprise may be taken at Rs.29 crores.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 16
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
1. This Valuation Report has been issued on the specific request of Omshakthy Fire
Realty Private Limited to ascertain the fair value of the enterprise in order to arrive
buyout of either of the segment of the shareholders from the corresponding segment
This Report is prepared exclusively for the above stated purpose and must not be
copied, disclosed or circulated or referred to in correspondence or discussion with
any other party. Neither this report nor its content may be used for any other purpose
without prior written consent of M/s V Narayanan & Co.
2. We have summarized the Valuation Analysis of the enterprise based on the
information as was provided to us pursuant to the meetings held with the
management of Company and other publically available information. We do not
assume any responsibility for the accuracy or reliability of such documents on which
we have relied upon in forming our opinion.
3. Although the beta for the Indian real estate players is in the range of 0.92 to 2.4, we
have assumed the beta of the company on a lower range of 0.25 as the company is in
the process of liquidating its business.
4. Although every effort has been made by us to verify and corroborate each
document and to ensure that no inaccurate or misleading data, information,
statement or opinion appears in this document, we wish to make it clear that the
information and data appearing herein are the responsibility of the contributors.
Accordingly, we do not accept any responsibility whatsoever for the consequences of
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 17
CaveatsCaveats
VALUATION ANALYSIS – OMSHAKTHY FIRE REALTY PRIVATE LIMITED
any such inaccurate or misleading information or data, opinion or statement
5. We have no present or planned future interest in O m s h a k t h y F i r e R e a l t y P r i v a t e
L i m i t e d and the fee for this Valuation analysis is not contingent upon the values
reported herein.
6. The Valuation Analysis contained herein is not intended to represent the value at any time
other than the date that is specifically stated in this Report. This Report is issued on the
understanding that the Management of O m s h a k t h y F i r e R e a l t y P r i v a t e
L i m i t e d has drawn our attention to all matters of which they are aware, which may
have an impact on our report up to the date of signature. We have no responsibility to
update this report for events and circumstances occurring after the date of this Report.
Annexures:
1. Valuation – Discounted Cash Flow Method
2. Projected Financials of O m s h a k t h y F i r e R e a l t y P r i v a t e L i m i t e d for period ending on
31/03/2015 and 30/06/2015.
3. Provisional Financials for the year ending 31/03/2014
4. Cash flow for the period ending 31/03/2014, 31/03/2015 and 30/06/2015.
V NARAYANAN & CO CHARTERED ACCOUNTANTS Page 18