sapm valuation

7/30/2019 SAPM Valuation

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Valuation

Rachna Nawhal1


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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

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CONTENT Introduction

Valuation Principles

Valuation Methods Summary

Valuation Range

Merger / Demerger valuation

Valuation of intangibles

Value -vs- price

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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


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Value has no statutory definition

Depends on purpose of valuation

Value has a different meaning and basis for different

purposes an persons

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VALUATION - DEFINED

ValuationValuationValuationValuation meansmeansmeansmeans thethethethe procedureprocedureprocedureprocedure

andandandand techniquetechniquetechniquetechnique ofofofof estimatingestimatingestimatingestimating thethethethe

timetimetimetime andandandand placeplaceplaceplace andandandand forforforfor aaaaspecificspecificspecificspecific

purposepurposepurposepurpose....

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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


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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

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VALUATION PRINCIPLES

Context

WhatWhatWhatWhat isisisis beingbeingbeingbeing valuedvaluedvaluedvaluedWhy it is being valued


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BASIC PREMISE OF VALUATION

---- ContextContextContextContext

COMPANYCompany

Division 1 Division N

Company


Company


SPECIFICASSET

Tangible

In-tangible10


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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


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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


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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....


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


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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

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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


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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

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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

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VALUATION

- A SNAPSHOT VIEW

fBusine

ss

EquityNet Current Assets

Intangibles

Value

Stakeholders

Liabilities

Assets

Tangibles

Fixed Assets

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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

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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

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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


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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

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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]

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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

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DCF VALUE

Discounted Cash Flow

ess

EquityDCF = Enterprise ValueDCF

Less Liabilities

Stakeholders

Liabilities

Equity

Va

lue

ofBusi

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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

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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

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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

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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


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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

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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

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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

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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

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FUTURE MAINTAINABLE EARNINGS


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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

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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

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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 -- -- --

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Determination04-05 05-06 06-07

OPBT / N W (operations) % % %

Net Worth (operations)

Average OPBT / N W %

Future Maintainable OPBT --

Tax -

Future Maintainable Earnings --

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APPROPRIATE TAX RATE


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APPROPRIATE TAX RATE

- Some key issues

Notional tax rate -vs- effectivetax ratetiming differences

permanen erences

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CAPITALISATION FACTOR


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CAPITALISATION FACTOR

- Some key issuesSecurity, risk

Market P ETrends in earnings

Other factors (internal andexternal)

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VALUATION METHODS

Market based valuation

Recent market transactionsMarket multiples

Benchmarking and negotiations

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MULTIPLES METHOD


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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

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MARKET BASED VALUATION


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- 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

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OthersOthersOthersOthers

Sales multipleSales multipleSales multipleSales multiple

Customer multipleCustomer multipleCustomer multipleCustomer multiple Telecom, InternetTelecom, InternetTelecom, InternetTelecom, Internet


- Generally used multiples

% of AUM% of AUM% of AUM% of AUM Mutual FundMutual FundMutual FundMutual Fund

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DIVERSIFIED COMPANY SOTP


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DIVERSIFIED COMPANY-SOTP

Company

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Business X Business Y Business Z Business A

Value of X

Value of Y Value of Z

Value of A

SOTP46

PREMIUMS & DISCOUNTS


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Percentage stake control, minority

Lack of marketability

Business dynamics

PREMIUMS & DISCOUNTS

Growth & margin trends

Holding company discount

Applicable on case to case basis

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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.

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SUMMARY l i f h h d


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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


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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

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Thank you

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sapm valuation

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