initial public offering -
TRANSCRIPT
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INITIAL PUBLIC OFFERING -
PROCESS & VALUATION METHOD
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INITIAL PUBLIC OFFERING
Raise Capital
Under Pricing / Over Pricing
Privately Held Companies
Significance to the Company
Significance to the Investor
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Risk Involved
Unpredictable
No past record of the Company
Business Risk
Financial Risk
Market Risk
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Analyzing An IPO Investment
Business Operations
Financial Operations
Marketing Operations
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IPO Valuation (DCF)
DCF analysis says that a company is worth all
of the cash that it could make available to
investors in the future. It is described as"discounted" cash flow because cash in the
future is worth less than cash today.
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DCFContinued
Company Competitive Position Excess Return/Forecast Period
Slow-growing company; operates inhighly competitive, low margin
industry .
1 year
Solid company; operates withadvantage such as strong marketing
channels, recognizable brand name, orregulatory advantage .
5 years
Outstanding growth company;
operates with very high barriers toentry, dominant market position orprospects .
10 years
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DCFContinued
Growth Rate:
HDIL is expected to grow at to have CAGR of 42
%( source: Emkay Research). We take fixedgrowth rate of 42% for DCF valuation for coming 5years.
Reinvestment Rate:
Equity Reinvestment Rate = Growth Rate / ROE = 42/76 = 55.26 %
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DCF Valuation
Forecasting Free Cash Flows:
EBIT (1-tax) [EBIT (1-tax) X Reinvestment
Rate] EBIT (1-tax) nth year = EBIT (1-tax) n-1 year X (1
+ growth rate)
Current Year 2008 2009 2010 2011 2012
ExpectedGrowth Rate - 42% 42% 42% 42% 42%
EBIT(1-tax) 6181 8777 12463 17698 25131 35686
Equity
Reinvestment
Rate - 55.26% 55.26% 55.26% 55.26% 55.26%
FCFE - 22185 30394 41639 57046 78153
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WACC
Cost of Equity (Re): CAPM = Cost of Equity = RF + Beta (Rm-Rf)
Cost of Debt (Rd):
Rd (1 - corporate tax rate).
Cost of Equity + Cost of DebtE/V 0.66 Rf 7.44
Corporate tax 30% Beta 1.1
D/V 0.34 Rm 13.5
Cost of Debt Cost of Equity
D/V x (1 - corporate tax rate) E/V x [Rf + Beta (Rm-Rf)]
0.34 [1-0.30] 0.66 [7.44 + 1.1 x 6]
WACC = Cost of Debt + Cost of Equity = 9.5%
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DCFContinued
2008 2009 2010 2011 2012
Free Cash Flow 3927 5576 7918 11243 15965
Discount rate 1.095 (1.095) (1.095) (1.095)4 (1.095)5
Present value 3586 4650 6030 7820 10141
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Terminal Value
We have assumed perpetuity growth rate for
HDIL as 6%
Net income of 2012 (1+ perpetuity growthrate)
= 35686 (1+0.06)
= Rs. 37827 mn
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Reinvestment rate after 2012
(Terminal Point): Reinvestment rate = PerpetuityGrowth
rate / Return on Equity
Return on equity will drop to the stable periodcost of capital of 9.5%.
Reinvestment rate (terminal point) = 6/9.5 =
63%
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Free cash flow = EBIT (1-
tax) [EBIT (1-tax) xReinvestment Rate]
Free cash flow 2013 = 37827 [37827 x 52%] =
Rs. 13936 mn.
GordonGrowth Model
Free cash flow of the year after the
terminal year /(Discount Rate PerpetuityGrowth Rate)
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Terminal Value
Terminal Value = 13936 100 /(9.5 6 ) =
Rs 146099 mn
Present value of = 146099 / (1.095)6 Terminal year
= Rs. 84754 mn
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Calculating Total Enterprise
Value: Total Enterprise = Sum of Present value for 5
years + Present value OfTerminal Year +
Cash Debt= 32228 + 84754 + 1949 - 3756 =Rs. 115175 mn
Fair value = Rs 115175 mn
Number of outstanding shares = 214 mn
Fair value of the HDIL per share = Rs 538
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NSE Data
Date Prev Close Open High Low Close Total Trd Qty Turnoverin Lacs
24-Jul-07 500 538.6 575.95 535 559.35 28590806 160030.8
25-Jul-07 559.35 549.4 587.4 545.3 580.1 8552244 48465.14
26-Jul-07 580.1 585.6 634.3 585.6 621.4 9125757 55976.88
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