1. Business valuation: Relative valuation methods – Issues and challenges Latha S Chari

2. What we will cover? Basic valuation concepts Purpose of valuation Methods of valuation – Trading comparables, Transaction comparables and DCF method of valuation using MS excel financial model

3. Valuation: Meaning, Concept Meaning: ascertaining value – real, intangible and financial assets Value – Price Value differs based on Purpose/Utility: Trading value (Value without control, value of minority interest) and Transaction value (Value with control) Value differs with time

4. Why Valuation ? Merger/Acquisition DemergerIPO/FPOSale/Disinvestment Private placementTest impairmentBuyback of shares

5. Valuation of Business Vs. Value of Equity Value of the operational business i.e Enterprise Value Value of debt (less cash) Bondholder value Enterprise value (Value of Business) Value of Equity Shareholder value - =

6. EV & Balance Sheet - a comprehensive picture Cash + Cash + Cash equivalents + Cash equivalents + Non controlled Investment s + Non controlled Investment s + Non-core assets + Non-core assets + Enterprise value (net operating assets: EV) Enterprise value (net operating assets: EV) Financial Invest- Ments, Invt in associates - Debt (MV) Debt (MV) Preference Shares Preference Shares Minority interest (MV –PE) Minority interest (MV –PE) Ordinary Equity value Ordinary Equity value = Land banks

7. Valuation Methods Asset based Earning based Market price based Market Price/Price multiples Market Comparables / transaction multiple DDM DCF Economic profit EV Multiples Net Asset Replacement value Liquidation value

8. Asset based – Net assets Method Net Asset = Total Assets (other than miscellaneous expenses and losses) – Total External Liabilities Net assets = Shareholders funds(other than revaluation reserve) – Miscellaneous expenses and losses

9. Asset based method – Replacement value, Liquidation value Replacement value = Replacement cost of assets - External liabilities Liquidation value = Sale value of assets – External liabilities.

10. Earning based Approach Dividend Discount models – Walter and Gorden models, One stage, two stage models single period and perpetuity models. Future expected dividends are discounted at opportunity cost of capital to investors to arrive a value of equity.

11. Earnings based approach - DCF Earning capacity of operating assets - Free cash flow to firm or Free cash flow to equity is ascertained. The same is discounted at CC to arrive at value of operating assets Earning capacity of operating assets is arrived at using Economic profit or concept of EVA and the same is discounted to arrive at value of operating assets

12. Multiple based method Based on linking VALUE/PRICE with its DRIVERS. Multiple ratio of what you pay/what you get. Earnings EBIT EBITDA Revenue Sales Sales growth Non Financial Employees Production quantity etc. Enterprise value or Price of equity

13. Most popular multiples Price earnings (PE) : Ratio of price per share and earnings per share. Price to book value (PBV): ratio of price per share to book value per share Price to Sales(PS): ratio of price per share to sales value per share. By replacing price by enterprise value we can get 3 more ratios, where EV = Market value of equity + market value of debt - cash

14. Understanding the multiples Define – understand its calculation Describe – cross section distribution Analyse – drivers of the multiples Apply – easily said than done

15. Understanding multiples – an example Mean multiples of the pharmaceutical sector for the period 200503-201003 PE, EV_PBIT AND EV_PBITDA fall within a range of 13-25 for the sector. However, PBV, Mcap_sales and EV_sales are distributed in a range of 3.25-4.97. In the last four quarters from 2009-03 to 2010-03 the entire sectors mean multiples have shown consistently increasing trend

16. Steps in relative valuation Peer Group Arrive at comparable companies (Size, nature, growth, margin, risk) Financial and non financial data Annual reports, direct discussion with the company Share price data, market and industry data Arrive at benchmark multiple and value Choice of multiple – PE, PBV, P-sales, EV/EBIT, EV/EBITDA, EV/Sales, EV/tonne, EV/subscriber etc. Mean, median and harmonic mean, or regressions.

17. Relative valuation an example – Basic facts

19. Relative valuation - projections Lupin Market data as on 31 March 2011 Open 417, H- 422, L- 409, C - 405 Lupin Market data as on 13 Jan, 2012: Lupin NSE: 52 week high – Rs.494, 52 week low – Rs.393

20. Issues & Challenges How to arrive at comparable companies? Which multiple to use for valuation – company specific. How to arrive at the benchmark multiple for the next period? Dynamic nature of drivers. Weak market efficiency

21. Thank You.