valuation-methods and parameters

8/11/2019 Valuation-methods and Parameters

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Importance of Valuation in M&A

National Conference on "Value Creation through M&A"

- CA Sujal Shah

30th April 2013

Valuation Concept

ValuePrice

Valuation not an exact Science, More of Art andSubjective assessment

Value varies with situations

Date specific


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Merger/Demerger

Private

Equity

IPO/ FPO

FamilySeparation

PPA

Portfolio Valueof Investments

RegulatoryApproval

Litigation

Test ofImpairment/

IFRS

Buyback ofShares

Purchase /Sale of

Business

Why

Valuation?

Fair Value of Assets


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Earning based approach

Discounted Cash Flow

Earnings Multiple Method

Market Approach

Market Price

Market ComparablesAsset Based Approach

Net Assets Method

Replacement Value/Realisable Value

Principal Methods of Valuation

Analysis of Company

SWOT Analysis

Profitability Analysis- Past andvis--vis industry

Ratio Analysis

P&L Ratios

o Expense & Profitability ratios

Balance Sheet Ratios

o Turnover Ratios

o Liquidity Ratios

o Debt Equity - of Company &

Industry


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Discounted Cash Flow

Values a business based on the expected cash

flows over a given period of time

Involves determination of discount factor and

growth rate for perpetuity

Value of business is aggregate of discounted

value of the cash flows for the explicit period

and perpetuity

Considers Cash Flow and Not Profits

DCF Parameters

Cash Flows

ProjectionsHorizon period

Growth rate

Discounting

Cost of Equity

Cost of Debt

Weighted Average Cost of

Capital (WACC)


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DCF When to use?

Most appropriate for valuing firms:

Limited life projects

Large initial investments and predictable cash

flows

Regulated business

Start-up companies

Earnings Multiple Method

Commonly used Multiples

Parameters

Future Maintainable Profits

Capitalization Rate/Multiple

Price to Earnings Multiple

Enterprise Value / EBITDA Multiple


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Multiples

Multiples to be applied represent the growth

prospects/ expectations of the Company

Factors to be considered while deciding the

multiple:

Past and Expected Growth of the Earnings

Performance vis--vis Peers

Size & Market Share

Historical Multiples enjoyed on the Stock

Exchange by the Company and its peers

Evaluates the value on the basis of prices quoted on

the stock exchange

Thinly traded / Dormant ScripLow Floating Stock

Significant and Unusual fluctuations in the Market

Price

It is prudent to take weighted average of quoted

price for past 6 months

Regulatory bodies often consider market value as

important basisPreferential allotment, Buyback,

Takeover Code

Market Price Approach


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Generally applied in case of unlistedentities

Estimates value by relating an elementwith underlying element of similarlisted companies.

Based on market multiples ofComparable Companies

Book Value Multiples

Industry Specific Multiples

Multiples from Recent M&A Transactions.

Market Comparables

NAV Formula

Total Assets

(excluding Miscellaneous Expenditure and debit balance

in Profit & Loss Account)

Less: Total Liabilities

NET ASSET VALUE

Share Capital

Add: Reserves

Less: Miscellaneous Expenditure

Less: Debit Balance in Profit & Loss Account

NET ASSET VALUE

OR


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Investments

Surplus Assets

Auditors Qualification

Preference Shares

ESOPs / Warrants

Contingent Liabilities/Assets

Tax concessions Findings of Due Diligence Reviews

Important Issues

Selection of Methods

Situation Approach

Knowledge based companies Earnings/Market

Manufacturing Companies Earnings/ Market/ Asset

Brand Driven companies Earnings/Market

A Matured company Earnings/Market

Investment/Property companies Asset

Company going for liquidation Asset

Generally, Market Approach is used in combination

with other methods or as a cross check


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Other Value Drivers

Final Value

Final Price is a result of negotiations

IPR / Brand Valuation


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INCOME

APPROACH

MARKET

APPROACH

COST

APPROACH

Relief from

Royalty Method

Market Price on

Active Markets

Comparable

Method

Incremental Cash

Flow Method

Reproduction

Cost Method

Replacement

Cost Method

Valuation Approach

Market Approach

Market Price on active markets:

Valuation is based on market prices.

Requires the relevant asset to have an ascertainable

price in an active market.

Comparable Method:

Price of a comparable market transaction can be

used, subject to strict comparability criteria regarding

the similarity between two intangible assets.

Analysis of similar intangible assets that have

recently been sold can be used.


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Income Approach

Relief from Royalty Method:

Typically employed for valuation of brands and patents

Based on the assumption that an external third partywould be prepared to pay a license fee for the use of brand

or patent that it does not own.

Value of the intangible asset is calculated as the presentvalue of the saved license payments.

Incremental Cash Flow Method:

To determine the difference between the cash flows of theacquired company with the relevant intangible assets anda fictitious company without these assets.

Difference represents the additional cash flow related tothe intangible asset and discounting this at the assetspecific capitalization rate leads to its fair value.

Cost Approach

Reproduction Cost Method:

Cost to construct an exact duplicate using same

materials, production standards and design, etc.

Replacement Cost Method:

Cost to construct equivalent utility using modern

materials, production standards and design, etc.


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Indian Regulatory

Requirement

Income Tax Act

Sec. 56(2)(vii)

Where a firm or a private company receives any property, being

shares of a private company without consideration or with

inadequate consideration (i.e. less than FMV), FMV of such shares

to be computed in accordance with Rule 11UA (given below)

Quoted shares - lowest price of such shares quoted on anyrecognized stock exchange on the valuation date

Unquoted equity shares value as computed under option (a)or (b) below at the option of the assesses

a) Net worth of the company after making adjustments as

specified in Rule 11UA; or

b) FMV as determined by a merchant banker or a chartered

accountant as per the DCF Method.


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Fresh Issue Transfer of Shares

Listed on SE(Quoted)

Unquoted

As per ListingGuidelines Of

SEBI

Value as per DCF

Method as certifiedby a Merchant

Banker or a CA

UnquotedListed on SE

(Quoted)

DCF MethodCertified by a

Merchant

Banker or a CA

As per ListingGuidelines Of

SEBI

Investment in

Indian Co

FEMA

Direct Investment

Outside India

Investment >

USD 5 Million

Investment

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