Upload
neeraj-simaiya
View
238
Download
0
Embed Size (px)
Citation preview
7/30/2019 SAPM Valuation
1/51
Valuation
Rachna Nawhal1
7/30/2019 SAPM Valuation
2/51
Learning Objectives
Understand the methodology for determining the
value of companies Identify the determinants of shareholder value
Appreciate the linkages between managerial actions
and shareholder value
2
7/30/2019 SAPM Valuation
3/51
CONTENT Introduction
Valuation Principles
Valuation Methods Summary
Valuation Range
Merger / Demerger valuation
Valuation of intangibles
Value -vs- price
3
7/30/2019 SAPM Valuation
4/51
SOME BASIC PROPOSITIONS
Value to a buyer will be different from the value to the sellerValue to a buyer will be different from the value to the seller
VALUE
like beauty
7/30/2019 SAPM Valuation
5/51
SOME BASIC PROPOSITIONS
Value has no statutory definition
Depends on purpose of valuation
Value has a different meaning and basis for different
purposes an persons
5
7/30/2019 SAPM Valuation
6/51
VALUATION - DEFINED
ValuationValuationValuationValuation meansmeansmeansmeans thethethethe procedureprocedureprocedureprocedure
andandandand techniquetechniquetechniquetechnique ofofofof estimatingestimatingestimatingestimating thethethethe
timetimetimetime andandandand placeplaceplaceplace andandandand forforforfor aaaaspecificspecificspecificspecific
purposepurposepurposepurpose....
6
7/30/2019 SAPM Valuation
7/51
Market CapitalisationLast updated: 17 Oct, 13:59
CompanyCompanyCompanyCompany Current Price (Rs)Current Price (Rs)Current Price (Rs)Current Price (Rs) EquityEquityEquityEquity Face ValueFace ValueFace ValueFace Value
Market Cap (RsMarket Cap (RsMarket Cap (RsMarket Cap (Rs
Cr)Cr)Cr)Cr)
Reliance Inds. 804.85 3,236.00 10 2,60,449.46
Tata Consultancy 1,281.60 195.72 1 2,50,834.75
ONGC 279.15 4,277.76 5 2,38,827.34
ITC Ltd. 286.70 782.29 1 2,24,282.54
Source : BSE website
Coal India Ltd. 352.90 6,316.36 10 2,22,904.34HDFC Bank 626.85 472.34 2 1,48,043.16
SBI 2,209.80 634.88 10 1,40,295.78
NTPC 169.00 8,245.46 10 1,39,348.27
Infosys 2,368.10 287.00 5 1,35,928.94
Hindustan
Unilever L 571.45 216.18 1 1,23,536.06
7/30/2019 SAPM Valuation
8/51
Price is what you pay.Price is what you pay.Price is what you pay.Price is what you pay.Value is what you get.Value is what you get.Value is what you get.Value is what you get.
Warren Buffett
8
7/30/2019 SAPM Valuation
9/51
VALUATION PRINCIPLES
Context
WhatWhatWhatWhat isisisis beingbeingbeingbeing valuedvaluedvaluedvaluedWhy it is being valued
7/30/2019 SAPM Valuation
10/51
BASIC PREMISE OF VALUATION
---- ContextContextContextContext
COMPANYCompany
Division 1 Division N
Company
Division 1 Division N
Company
Division 1 Division N
SPECIFICASSET
Tangible
In-tangible10
7/30/2019 SAPM Valuation
11/51
VALUATION PURPOSES
RestructuringRestructuringRestructuringRestructuring ---- Merger/Merger/Merger/Merger/ Demerger/Demerger/Demerger/Demerger/ HiveHiveHiveHive offoffoffoff
IntroductionIntroductionIntroductionIntroduction ofofofof StrategicStrategicStrategicStrategic InvestorInvestorInvestorInvestor //// JointJointJointJoint VentureVentureVentureVenture PartnerPartnerPartnerPartner
ListingListingListingListing ofofofof thethethethe SharesSharesSharesShares
ESOP/SweatESOP/SweatESOP/SweatESOP/Sweat EquityEquityEquityEquity
BuybackBuybackBuybackBuyback ofofofof SharesSharesSharesShares
ManagementManagementManagementManagement reportingreportingreportingreporting
PortfolioPortfolioPortfolioPortfolio ValueValueValueValue ofofofof InvestmentsInvestmentsInvestmentsInvestments
DisinvestmentDisinvestmentDisinvestmentDisinvestment bybybyby GovernmentGovernmentGovernmentGovernment
RBI/SEBIRBI/SEBIRBI/SEBIRBI/SEBI ApprovalApprovalApprovalApproval
TaxTaxTaxTax IncomeIncomeIncomeIncome TaxTaxTaxTax //// TransferTransferTransferTransfer pricingpricingpricingpricing
LitigationLitigationLitigationLitigation
AllocationAllocationAllocationAllocation ofofofof purchasepurchasepurchasepurchase pricepricepriceprice
AccountingAccountingAccountingAccounting---- impairment,impairment,impairment,impairment, ASASASAS 31313131
Integral to any deal/transaction11
7/30/2019 SAPM Valuation
12/51
VALUATION PRINCIPLES
Timing -Valuation is relative to a specific point in time
Basis Going concern vis--vis liquidationpremium for control, efficiency and synergy
Extent of control ownership, management,various thresholds
Value different from Price
7/30/2019 SAPM Valuation
13/51
ValuationValuationValuationValuation isisisis notnotnotnot justjustjustjust aaaa science,science,science,science, butbutbutbut anananan artartartart.... ThoughThoughThoughThough
quantitativequantitativequantitativequantitative inininin nature,nature,nature,nature, thethethethe valuationvaluationvaluationvaluation methodsmethodsmethodsmethods
requirerequirerequirerequire inputsinputsinputsinputs thatthatthatthat areareareare basedbasedbasedbased onononon subjectivesubjectivesubjectivesubjectivejudgmentjudgmentjudgmentjudgment.... Hence,Hence,Hence,Hence, anyanyanyany preconceptionpreconceptionpreconceptionpreconception orororor biasbiasbiasbias ofofofof thethethethe
anal stanal stanal stanal st isisisis reflectedreflectedreflectedreflected inininin thethethethe valuevaluevaluevalue....
VALUATION PRINCIPLES
ValueValueValueValue ofofofof anyanyanyany assetassetassetasset willwillwillwill dependdependdependdepend onononon thethethethe earningsearningsearningsearnings ////cashflowcashflowcashflowcashflow thatthatthatthat itititit isisisis expectedexpectedexpectedexpected totototo generategenerategenerategenerate inininin thethethethe futurefuturefuturefuture
forwardforwardforwardforward lookinglookinglookinglooking
Valuation is not just a science, but an art.13
7/30/2019 SAPM Valuation
14/51
SOME BASIC PROPOSITIONS
Value from a buyers viewpoint will vary depending onthe type and/or needs of the buyer
An existing player in Indiaextension or addition to product range and/or
capacity eg; Godrej - Good Night, Pharma brands-
backward / forward integrationmarket share enhancement Aditya Birla Group
Ultratech
New player in India
entry strategy eg; Coke - Parle
14
7/30/2019 SAPM Valuation
15/51
STEPS IN VALUATION
ObtainingObtainingObtainingObtaining informationinformationinformationinformation
UnderstandingUnderstandingUnderstandingUnderstanding ofofofof companyscompanyscompanyscompanys businessbusinessbusinessbusiness &&&& industryindustryindustryindustry
ReviewingReviewingReviewingReviewing datadatadatadata providedprovidedprovidedprovided
IndependentIndependentIndependentIndependent ResearchResearchResearchResearch industryindustryindustryindustry &&&& companycompanycompanycompany
SelectingSelectingSelectingSelecting method(s)method(s)method(s)method(s) totototo bebebebe usedusedusedused
ConsiderConsiderConsiderConsider thethethethe inputsinputsinputsinputs fromfromfromfrom recentrecentrecentrecent transactionstransactionstransactionstransactions ConductingConductingConductingConducting sensitivitiessensitivitiessensitivitiessensitivities &&&& scenariosscenariosscenariosscenarios onononon inputsinputsinputsinputs pastpastpastpast ////
projectedprojectedprojectedprojected
RecommendingRecommendingRecommendingRecommending valuesvaluesvaluesvalues //// rangerangerangerange
7/30/2019 SAPM Valuation
16/51
SOURCES OF INFORMATION
HistoricalHistoricalHistoricalHistorical datadatadatadata suchsuchsuchsuch asasasas auditedauditedauditedaudited resultsresultsresultsresults ofofofof thethethethe subjectsubjectsubjectsubjectcompanycompanycompanycompany....
DiscussionsDiscussionsDiscussionsDiscussions withwithwithwith thethethethe managementmanagementmanagementmanagement ofofofof thethethethe companycompanycompanycompany
DataDataDataData onononon projectsprojectsprojectsprojects plannedplannedplannedplanned //// underunderunderunder implementationimplementationimplementationimplementation
FutureFutureFutureFuture projectionsprojectionsprojectionsprojections
ExternalExternalExternalExternal //// IndependentIndependentIndependentIndependent reportsreportsreportsreports industry,industry,industry,industry, company,company,company,company,comparablecomparablecomparablecomparable company,company,company,company, marketmarketmarketmarket surveyssurveyssurveyssurveys
StockStockStockStock marketmarketmarketmarket quotationsquotationsquotationsquotations
DataDataDataData onononon comparablecomparablecomparablecomparable companiescompaniescompaniescompaniesRepresentationRepresentationRepresentationRepresentation bybybyby thethethethe managementmanagementmanagementmanagement
16
7/30/2019 SAPM Valuation
17/51
UNDERSTANDING BUSINESS OF
UNDERLYING ASSETCore to valuationCore to valuationCore to valuationCore to valuation
Qualitative factorsQualitative factorsQualitative factorsQualitative factors
Competitive environmentCompetitive environmentCompetitive environmentCompetitive environmentRegulatory environmentRegulatory environmentRegulatory environmentRegulatory environment
Management, Promoter Group,Management, Promoter Group,Management, Promoter Group,Management, Promoter Group,
Industry, peer groupIndustry, peer groupIndustry, peer groupIndustry, peer groupAnalysis of financial statementsAnalysis of financial statementsAnalysis of financial statementsAnalysis of financial statements
Future prospects / Growth potentialFuture prospects / Growth potentialFuture prospects / Growth potentialFuture prospects / Growth potential
Margin analysisMargin analysisMargin analysisMargin analysisVariance analysisVariance analysisVariance analysisVariance analysis
Identifying key value drivers & key risk areas
17
7/30/2019 SAPM Valuation
18/51
VALUATION
- A SNAPSHOT VIEW
fBusine
ss
EquityNet Current Assets
Intangibles
Value
Stakeholders
Liabilities
Assets
Tangibles
Fixed Assets
18
7/30/2019 SAPM Valuation
19/51
VALUATION METHODS
Asset based valuationAsset based valuationAsset based valuationAsset based valuation
Net Asset (book) valueNet Asset Value - AdjustedNet Asset Value - ReplacementLiquidation value
Earnings based valuationEarnings based valuationEarnings based valuationEarnings based valuation
scounte as owCapitalisation of earningsMarket based valuationMarket based valuationMarket based valuationMarket based valuation
Market multiples
Recent market transactionsMarket price
19
7/30/2019 SAPM Valuation
20/51
Asset based valuation
Net Asset ValueNet Asset ValueNet Asset ValueNet Asset Value ---- AdjustedAdjustedAdjustedAdjustedNet Asset ValueNet Asset ValueNet Asset ValueNet Asset Value ---- ReplacementReplacementReplacementReplacementLiquidation valueLiquidation valueLiquidation valueLiquidation value
VALUATION METHODS
Value
ofBusines
Stakeholders
Liabilities
Equity
Assets
Tangibles
Fixed Asset
Net Current Asset
Intangibles
20
7/30/2019 SAPM Valuation
21/51
NET ASSET VALUE(ADJUSTED)
- Some key issues Net worth (book value) [BV]
Realisable value of non-operational asset [RVNOA] Investments Surplus land, buildings Factory (closed)
os o sposaD
Tax on disposal [t]
Other Adjustments
NAVAdjusted = [BV] + [RVNOA] - [CD] - [t] +/- Adjustments
contd.21
7/30/2019 SAPM Valuation
22/51
NET ASSET VALUE(ADJUSTED)
- Some key issuesNet worth (book value) sometimes do not reflect
assets which are of enduring nature but have been
expensed as revenue, for example; returnable containers - bottles in a soft drinks
business
the real cost, for example; dies, jigs and fixtures, which have been made
based on a companys design & drawings and thecost reflects only the material and labour cost paid
to the die maker
22
7/30/2019 SAPM Valuation
23/51
REPLACEMENT VALUE (ASSET)
- Some key issues Cost of new asset [RVnew]
Similar condition
Same utility
o a e total an a ance e Balance Technical life
Economic life
Capitalisation cost of new asset [Cc]
Rep. Value = [RVNew] * [L Balance] / [Ltotal] + [Cc]
23
7/30/2019 SAPM Valuation
24/51
LIQUIDATION VALUE
- Some key issues
Realisable value of assets
Cost of disposal
Tax on disposal
Retrenchment and other costOutstanding liabilities
Tax on distribution of profits
24
7/30/2019 SAPM Valuation
25/51
DCF VALUE
Discounted Cash Flow
ess
EquityDCF = Enterprise ValueDCF
Less Liabilities
Stakeholders
Liabilities
Equity
Va
lue
ofBusi
25
7/30/2019 SAPM Valuation
26/51
VALUATION
- THE STARTING POINT
The Value of a company /businesswill be related to
the profits it will earnand the cash it will generatein the future
26
7/30/2019 SAPM Valuation
27/51
FREE CASH FLOW
- Some key issuesCash flow projectionsDiscrete period and beyond
Continuity value
1 2 3 4 5 6 7 8 9
Cash FlowDiscrete period
27
7/30/2019 SAPM Valuation
28/51
DISCOUNTED CASH FLOW (DCF)
METHOD
- Free cash flow
Most commonly used method
Value of business is the sum of the present value of all thefuture free cash flows
-
- Continuity value
28
7/30/2019 SAPM Valuation
29/51
NET FREE CASH FLOW OF FIRM
- ConceptProfit before interest & tax (PBIT)
LESSAdjusted tax
Net Operating Profit Less Adjusted Tax
overcoming theovercoming theovercoming theovercoming the
impact of capitalimpact of capitalimpact of capitalimpact of capitalstructure on thestructure on thestructure on thestructure on thebusiness valuebusiness valuebusiness valuebusiness value
ADDDepreciation
Gross Free Cash Flow of the Firm
LESSCapital expenditureIncrease / decrease in working capital
Net Free Cash Flow of the Firm29
7/30/2019 SAPM Valuation
30/51
FREE CASH FLOW
- Some key issues Cash flow projections (contd)
Constant prices -vs- inflation
Length of discrete period - cyclical businessAssumptions related to :growth in market, sales volume, etc.
increase in sales price, RM cost, manpower,etc.changes (expectation) in direct and in-direct
taxation
30
7/30/2019 SAPM Valuation
31/51
DISCOUNTING RATE
- Some key issuesWeighted Average Cost of Capital (WACC)
WACC=[D/(D+E)*Kd *(1-t)]+[E/(D+E)*Ke]
D = Debt= qu y
t = Income tax rateKd = pre-tax cost of debtKe = post-tax cost of equity
o Future expectations related to
31
7/30/2019 SAPM Valuation
32/51
DISCOUNTING RATE
- Some key issues
Ke = Rf + B * (Rm - Rf) + SCRP
where,
f
= r s ree re urnRm = return on marketB = BetaSCRP = Specific Company Risk Premium
32
7/30/2019 SAPM Valuation
33/51
7/30/2019 SAPM Valuation
34/51
CAPITALISATION OF EARNINGS METHODCommonly known as
- Price Earnings Capitalisation Value (PECV)
Value of E uit = future maintainable rofitsValue of E uit = future maintainable rofitsValue of E uit = future maintainable rofitsValue of E uit = future maintainable rofits ca italisationca italisationca italisationca italisation
---- FutureFutureFutureFuture maintainable earnings (FME)maintainable earnings (FME)maintainable earnings (FME)maintainable earnings (FME)
---- AppropriateAppropriateAppropriateAppropriate tax ratetax ratetax ratetax rate---- CapitalisationCapitalisationCapitalisationCapitalisation rate / factorrate / factorrate / factorrate / factor
raterateraterate
34
FUTURE MAINTAINABLE EARNINGS
7/30/2019 SAPM Valuation
35/51
FUTURE MAINTAINABLE EARNINGS -
Some key issues
NonNonNonNon----recurring transactionsrecurring transactionsrecurring transactionsrecurring transactions
Changes in circumstances (productChanges in circumstances (productChanges in circumstances (productChanges in circumstances (product----marketmarketmarketmarket
Income and expenses related to nonIncome and expenses related to nonIncome and expenses related to nonIncome and expenses related to non----operational assetsoperational assetsoperational assetsoperational assets
Appropriate past periodAppropriate past periodAppropriate past periodAppropriate past period
35
FUTURE MAINTAINABLE EARNINGS
7/30/2019 SAPM Valuation
36/51
FUTURE MAINTAINABLE EARNINGS -
Determination04-05 05-06 06-07
Profit Before Tax
LESS INCOME fromNon-operating
Non-recurring transactions
Operating PBT -- -- --
ADD EXPENSES ofNon-operating
Non-recurring transactions
36
FUTURE MAINTAINABLE EARNINGS
7/30/2019 SAPM Valuation
37/51
FUTURE MAINTAINABLE EARNINGS -
Determination03-04 04-05 05-06 06-07
Equity + reserves
LESSNon-operating investments
Net Worth (operations) - - - -
OPBT / N W (operations) --% --% --%
Average Net Worth (operations) -- -- --
Operating PBT -- -- --
37
FUTURE MAINTAINABLE EARNINGS
7/30/2019 SAPM Valuation
38/51
FUTURE MAINTAINABLE EARNINGS -
Determination04-05 05-06 06-07
OPBT / N W (operations) % % %
Net Worth (operations)
Average OPBT / N W %
Future Maintainable OPBT --
Tax -
Future Maintainable Earnings --
38
APPROPRIATE TAX RATE
7/30/2019 SAPM Valuation
39/51
APPROPRIATE TAX RATE
- Some key issues
Notional tax rate -vs- effectivetax ratetiming differences
permanen erences
39
CAPITALISATION FACTOR
7/30/2019 SAPM Valuation
40/51
CAPITALISATION FACTOR
- Some key issuesSecurity, risk
Market P ETrends in earnings
Other factors (internal andexternal)
40
7/30/2019 SAPM Valuation
41/51
VALUATION METHODS
Market based valuation
Recent market transactionsMarket multiples
Benchmarking and negotiations
41
MULTIPLES METHOD
7/30/2019 SAPM Valuation
42/51
MULTIPLES METHOD
Value of Equity = Multiple * RelevantValue of Equity = Multiple * RelevantValue of Equity = Multiple * RelevantValue of Equity = Multiple * RelevantProfitProfitProfitProfit
---- MultipleMultipleMultipleMultiple---- EarningsEarningsEarningsEarnings determination covereddetermination covereddetermination covereddetermination covered
under PECVunder PECVunder PECVunder PECV
42
MARKET BASED VALUATION
7/30/2019 SAPM Valuation
43/51
MARKET BASED VALUATION
- Generally used multiplesEarnings basedEarnings basedEarnings basedEarnings basedP EP EP EP E multiplemultiplemultiplemultiple Equity ValueEquity ValueEquity ValueEquity ValueEBITEBITEBITEBIT multiplemultiplemultiplemultiple Enterprise ValueEnterprise ValueEnterprise ValueEnterprise Value
EBIDTAEBIDTAEBIDTAEBIDTA multiplemultiplemultiplemultiple Enterprise ValueEnterprise ValueEnterprise ValueEnterprise Value
Book valueBook valueBook valueBook value multiplemultiplemultiplemultiple Equity ValueEquity ValueEquity ValueEquity ValueEnterprise valueEnterprise valueEnterprise valueEnterprise value to total assets multipleto total assets multipleto total assets multipleto total assets multiple
Adjusting the Benchmark Multiples criticalAdjusting the Benchmark Multiples criticalAdjusting the Benchmark Multiples criticalAdjusting the Benchmark Multiples critical
43
MARKET BASED VALUATION
7/30/2019 SAPM Valuation
44/51
OthersOthersOthersOthers
Sales multipleSales multipleSales multipleSales multiple
Customer multipleCustomer multipleCustomer multipleCustomer multiple Telecom, InternetTelecom, InternetTelecom, InternetTelecom, Internet
MARKET BASED VALUATION
- Generally used multiples
% of AUM% of AUM% of AUM% of AUM Mutual FundMutual FundMutual FundMutual Fund
44
7/30/2019 SAPM Valuation
45/51
DIVERSIFIED COMPANY SOTP
7/30/2019 SAPM Valuation
46/51
DIVERSIFIED COMPANY-SOTP
Company
28
Business X Business Y Business Z Business A
Value of X
Value of Y Value of Z
Value of A
SOTP46
PREMIUMS & DISCOUNTS
7/30/2019 SAPM Valuation
47/51
Percentage stake control, minority
Lack of marketability
Business dynamics
PREMIUMS & DISCOUNTS
Growth & margin trends
Holding company discount
Applicable on case to case basis
47
7/30/2019 SAPM Valuation
48/51
MARKET PRICE
ValueValueValueValue determined by taking the average of thedetermined by taking the average of thedetermined by taking the average of thedetermined by taking the average of the
equity shares as quoted on a recognised stockequity shares as quoted on a recognised stockequity shares as quoted on a recognised stockequity shares as quoted on a recognised stock
exchange over appropriate period.exchange over appropriate period.exchange over appropriate period.exchange over appropriate period.Listed companiesListed companiesListed companiesListed companies
Most recent
Period based
Statutory
Trading nature ?Trading nature ?Trading nature ?Trading nature ?
Volumes, pattern of holdings, etc.
48
SUMMARY l i f h h d
7/30/2019 SAPM Valuation
49/51
SUMMARY analysis of each methodMethods Relevance Advantages Disadvantages
NAV Liquidation
Investment, Asset
DominantPaucity /uncertainty of FMP
Surplus/ Non
Easy to apply
Easy to explain
Ignores future value /earnings/ cash flows /
intangiblesBased on past
Not applicable to someindustries
operating assets
MarketPrice
Acquisition
Regulatory approval
Perception of variety ofinvestors pricing atarms length basis
Regulatory acceptance
Simple to understandRelatively easy & quickto perform
Based on currentmarket conditions
Speculative element
Applicable only forlisted entities
Cannot apply to a
segment of listed entity.Difficult to identifyexactly comparablecompany.
SUMMARY analysis of each method
7/30/2019 SAPM Valuation
50/51
SUMMARY analysis of each method
Methods Relevance Advantages Disadvantages
PECV/Multiples /Transaction
Going concern
Acquisition
Feel the deal
Simple to understand
Relatively easy & quick toperform
Based on current marketconditions
Useful when reliable cashflowestimates are not available
Considers profits, ignores cash /time value
Past focus-PECV
No indication of whether marketpriced correctly.
Lack of truly comparable companies
Subjectivity in applying multiples
-transaction details.
DCF Going concern
Acquisition
Evaluation of newprojects
New emerging
companies /industries
Considers Cashflow
Considers Future value
Considers additional capex,working capital
Permits sensitivity / scenarios
50505050
7/30/2019 SAPM Valuation
51/51
Thank you
51