1. 1. 1
2. 2. Sales Multiple P/E multiple Price to Book multiple Enterprise value to EBIT multiple2
3. 3. If valuation is being done for an IPO or a takeover, Value of firm = Average Transaction P/E multiple EPS of firm Average Transaction multiple is the average multiple of recenttransactions (IPO or takeover as the case may be) If valuation is being done to estimate firm value Value of firm = Average P/E multiple in industry EPS of firm This method can be used when firms in the industry are profitable (have positive earnings) firms in the industry have similar growth (more likely for matureindustries) firms in the industry have similar capital structure3
4. 4. The application of this method is similar to thatof the P/E multiple method. Since the book value of equity is essentially theamount of equity capital invested in the firm, thismethod measures the market value of eachrupee of equity invested. This method can be used for companies in the manufacturing sector which havesignificant capital requirements. 4
5. 5. This multiple measures the enterprise value , that isthe value of the business operations (as opposed to thevalue of the equity). In calculating enterprise value, only the operational valueof the business is included. Generally Value from investment activities, such asinvestment in treasury bills or bonds, or investment instocks of other companies, is excluded.5
6. 6. A BCEnterprise market value/sales 1.4 1.11.1Enterprise market value/EBITDA 17.015.0 19.0Enterprise market value/free cash flows2026 26Application to XYZ Co.Sales Rs. 200 croresEBIDTARs. 14 croresFree cash flowRs. 10 crores 6
7. 7. A BCAverageEnterprise market value/sales 1.41.1 1.11.2Enterprise market value/EBITDA 17.0 15.019.0 17.0Enterprise market value/free cash flows20.0 26.026.0 24.0Application to XYZ Co. Average ValueSales Rs. 200 crores 1.2 Rs. 240 croresEBIDTARs. 14 crores 17.0 Rs. 238 croresFree cash flowRs. 10 crores 24.0 Rs. 240 crores7
8. 8. DE FEnterprise market value/sales 2.6 1.90.9Enterprise market value/EBITDA 10.021.04.0Enterprise market value/free cash flows21.030.0 24.0Application to PQR Co.Sales Rs. 300 croresEBIDTARs. 15 croresFree cash flowRs. 7.5 crores 8
9. 9. D EFAverageEnterprise market value/sales 2.61.9 0.91.8Enterprise market value/EBITDA 10.0 21.0 4.0 11.7Enterprise market value/free cash flows21.0 30.024.0 25.0Application to PQR Co. Average ValueSales Rs. 300 crores 1.8 Rs. 540 croresEBIDTARs. 15 crores 11.7 Rs. 175.5 croresFree cash flowRs. 7.5 crores25.0 Rs. 187.5 crores Can this be used as a dependable guide for valuation9
10. 10. Using fundamentals Valuation related to fundamentals of business beingvalued Using comparables Valuation is estimated by comparing business with acomparable fit10
11. 11. Using fundamentals for multiples to beestimated for valuation Relates multiples to fundamentals of business beingvalued, eg earnings, profits Similar to cash flow model, same information isrequired Shows relationships between multiples and firmcharacteristics11
12. 12. Using Comparables for estimation of firm value Review of comparable firms to estimate value Definition of comparable can be difficult May range from simple to complex analysis12
13. 13. Simple and easy to use Useful when data of comparable firms andassets are available. Require less time and efforts Easier to justify and sell. Closer to the market value (more value if thecomparable firm is getting more in the market) 13
14. 14. Easy to misuse Selection of comparable can be subjective Errors in comparable firms get factored intovaluation model RGC (Risk, Growth, Cash Flow) may beignored. Have a short shelf life (compared tofundamentals). 14
15. 15. I) Select the relevant measure and value drivers. II) Identification of the COMPS. III) Select and calculate appropriate multiple aggregation of multiple into single number throughanalysis of COMPS. IV) Apply to the company V) Make final adjustments for non-operatingassets, Contingent liabilities and convertibles. 15
16. 16. Equity multiple or entity multiple ? Which value driver/ multiple to use? Trailing multiple or forward looking multiple? More number of multiples vs. less multiples ? 16
17. 17. Matching principle numerator and denominator shouldhave consistent definition Capital structure equity multiple is greatly affected bythe capital structure than entity multiple Difference in earning guidance and investment andpayout policy Enterprise value most of the requires approximation ofdebt value Stage of business life cycle Empirical research supports forward looking multiplesprocessing two years analysts forecast 17
18. 18. Use industry classification system or at least listfirms competitorsSIC: Standard Industrial classificationGICS: Global industry classification benchmark Size and region Number of comparables- 4 to 8 ideal size ( plus or minus 218
19. 19. Management Style Size Product & Customer diversification Technology Key Financial trends Strategic & operational strategies Market positioning & maturity of operation Geographical consideration Trading volume of selected companies Price volatility () Distribution of multiples across the sector & market 19
20. 20. P/E (Price Earning Ratio) P/B (Price to Book Ratio) Equity / Sales Equity / Cash flow Equity / PAT Equity / Book value of share 20
21. 21. MVIC / Sales MVIC / EBITDA MVIC / EBIT MVIC / Book value of invested capital MVIC/TA21
22. 22. PER most commonly used multiples Make sure definition is consistent & uniform PER = MPS / EPS Variant of PER Current PER = Current MPS / Current EPS Some analyst may use average price over last 6m or a year Trailing PER = Current MPS / EPS based on last 4 quarters. [or, LTM: Last twelve months] Forward PER = Current MPS / expected EPS during next F/Y EPS may further be based on fully diluted basis or primary basis EPS may include or exclude extraordinary items 22
23. 23. For Growth Company forward PER will consistently givelow value than trailing PER Bullish valuer use forward PER to conclude that stock isundervalued. Bearish valuer will consider Current PER to justify thatStock is overvalued. Full Impact of dilution may not occur during next yearleading to lower EPS. While using industry PER be careful about outliers MLF (money loosing firm) creates a bias in selection Equity value is calculated based on existing outstandingshares but EPS is on fully diluted basis. 23
24. 24. PEG = PER / expected growth in EPS One mistake analyst will make to consider growth inoperating income rather than EPS Growth should be consistent with PER calculation Never use forward PER for PEG as it amounts to doublecounting of growth Lower the PEG better the stock If PER is high without growth prospect, PEG will be high risky firm PEG does not consider risk taken in growth andsustainability of growth. 24
25. 25. P/B ratio = market value of equity / book value of equity Book value is computed from the Financial Statement Price of book ratio near to 4 is highly priced stock [meanP/B ratio of all listed firm in USA during 2006 was 4] Price to Sales ratio (Revenue multiple) = market value of equity Revenue The larger the revenue multiple better it is. Generally there is no sectoral Revenue multiple. 25
26. 26. MVIC multiple look at market value of operatingassets of the firm (and not only for equityinvested). MVIC multiple is not affected by Finance leverage. If firms under comparison are differing in theirfinancial leverage, put more reliance on MVICmultiple. 26
27. 27. The market approach is especially relevant if standard of value isFMV. No company is exactly comparable to another, this approachrequires best of extensive guidance that market can provide. The subject company need not be exactly in the similar businessbut should be impacted by the same economic influences. Size difference between two companies can be adjusted for: Equity or MVIC multiple can be used for valuing eithercontrolling or minority interest. MVIC multiple is preferable for valuing controllinginterest and equity multiple for minority interest 27
28. 28. If MVIC is used to value on a minority interest basis, noadjustment should be made to the subject companysactual capital structure (since minority shareholderscannot force such an adjustment) Equity should be taken on a fully diluted basis (Foroptions, warrants, convertibles, the no. of equity unitsshould be computed as if conversion rights wereexercised.[No. of units of ES O/S = no. of ES after dilution]28
29. 29. MVIC = Equity + PS + LTD + current portion of LTID[or all IBD, i.e. interest bearing debt][may also subtract cash or cash equivalent. Marketablesecurities are included with cash equivalent] This is more preferable because different cash mixcreates problem. 29
30. 30. MVIC should be on M P basis and it is not bookvalue. Market value of equity multiple can be either onper share basis or on a total basis. Price per share/ EPS or, MV of Equity/PAT Round multiple to one decimal MVIC should be on a total company basis ratherthan on a per-share basis 30
31. 31. Conceptually only LTD (including currentportion of LTD) should be considered. Due to practical difficulty we use AIBL [ difficult to assess how much interest isshort term or long term. Some companiesuse ST debt as if it is LTD] 31
32. 32. Description of the subject Co. in terms of Line of business Market served Size: Revenue and Asset Other criteriaI) Then use above information to select guideline Co.II) Based on definition create a population of companies in similar line ofbusinessIII) Normalize financials of both subject Co. & guideline Co.IV) Carryout comparative Financial analysisV) Identify and list similarities and assess relative strength and weakness.[site visit and management interviews helps] 32
33. 33. VI) Gather industry & economic date. Identify positions ofsubject Co. in industry. Assess how economic factor willaffect both. VII) Choose what multiples to rely on and the appropriatevalue for each multiple. Two factors that influence selection of multiples of operatingvariables are Growth prospects of subject company relative to guideline Risk 33
34. 34. IndustryBest measure of valueAutoPrice to Earnings (PE) multipleBanking PE and Price to Book Value (PBV) orAdjusted PBV multipleCementPE, Enterprise Value to Earningsbefore interest, tax, depreciation &amortisation (EV/EBITDA), EV/tonneEngineering Forward PE, which reflects the orderbook position of the company
35. 35. IndustryBest measure of valueFMCGPE, Return on Equity (RoE) and Returnon Capital Employed (RoCE) ratiosReal Estate Net asset value (NAV), which is bookvalue at market prices. Also look at debtlevelsTelecom PE and DCF, because there is a futurestream of cash flows for upfront heavyinvestmentOil & Gas Residual reserves of energy assetsTechnologyTrailing PE and its growth
36. 36. IndustryFactors ImpactingAutoVolume growth, realisations, operatingprofit margins, new product launchesBanking Loan growth, non-performing assets,net interest margins, CASA ratioCementDispatches, operating costs, regionaldemand supply equationEngineering Order book inflows, execution skills,marginsFMCGRoE, RoCE, margins, volume growth,new products, market share
37. 37. IndustryFactors ImpactingReal Estate Debt levels, liquid assets, inventorylevels, promoters ability to raise fundsUtilities & Project costs, plant load factors, rawPower material costs, debt equity ratiosTelecom OPEX , ARPU, TOWERS, debt equityratiosOil & Gas Project costs, debtequity ratiosTechnologyOrder inflow, ability to contain costs,service verticals, profitability, clientattrition