valuation aspects in foreign direct investment and india competitiveness
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Valuation aspects in Foreign Direct Investment and India Competitiveness
July 10, 2015
Growing Cos.
Turnover/Profits: Increasing still Low Proven Track Record: Limited Valuation Methodology: Substantially on Business Model Cost of Capital: Quite High
High Growth Cos.
Turnover/Profits : Good Proven Track Record: Available Valuation Methodology: Business Model with Asset
Base Cost of Capital: Reasonable
Mature Cos.
Turnover/Profits: Saturated Proven Track Record: Widely Available Method of Valuation: More from Existing Assets Cost of Capital: May be High
Declining Cos.
`
Turnover/Profits: Drops Proven Track Record: Substantial
Operating History Method of Valuation: Entirely
from Existing Assets Cost of Capital: N.A.
Turnover/Profits: Negligible Proven Track Record: None Valuation Methodology: Entirely on Business Model Cost of Capital: Very High
Start Up Cos.
Turn
over
/ P
rofit
s
Time
Valuation across business cycle follow the law of economics
Income Based Method
Market Based Method
Asset Based Method Other Methods
Multiple Valuation approaches for varied Context and Purpose
RBI Valuation Guidelines, Now give flexibilityParticulars Valuation before
April 21, 2010 Valuation before
April 1, 2014
Valuation after 8th July 2014
Guidelines in Force CCI Guidelines In case of FDI Transactions:Listed Company: Market Value as per SEBI Preferential Allotment GuidelinesUnlisted Company: DFCF
In case of ODI Transactions:No method has been prescribed
In case of FDI Transactions:Listed Company: Market Value as per SEBI Guidelines as applicableUnlisted Company: Any international accepted pricing methodology for valuation of shares on arm's length basis
In case of ODI Transactions:No method has been prescribed
Methods Prescribed
Net Assets Value (NAV)
Profit Earning Capacity
Value(PECV)
Market Value (in case of Listed
Company)
Discount 15% Discount has been prescribed on account of Lack of Marketability
No such Discount has been prescribed
No such Discount has been prescribed
Historical / Futuristic
It is based on Historical Values It is based on Future Projections Depends upon method being used
Possibility of variation in Value Conclusion
As valuation is more Formulae based, final values came standardized
As valuation is more dependent on Assumptions and choice of factors like Growth Rate, Cost of Capital etc, value conclusion may vary significantly.
There is flexibility to choose valuation methods as per the facts of the case
Specimen Valuation multiples (Public markets) in India across Industries
Source:-Damodaran Online Dated: Jan, 2015 (Adjusted)
Industry Beta EV/EBITDA Trailing PE Forward PE
Aerospace/Defense 1.08 23.39 24.41 20.12Air Transport 0.32 22.53 abnormal 22.44Apparel 0.66 7.85 abnormal 26.59Auto & Truck 1.92 8.13 24.42 20.23Auto Parts 1.11 11.57 35.42 19.76Chemical (Specialty) 1.08 11.45 21.62 15.10Coal & Related Energy 0.94 9.78 9.85 8.77Drugs 0.95 11.48 23.75 19.22Education 1.19 12.00 abnormal 22.09Engineering 1.09 15.15 26.00 20.73Entertainment 0.93 13.95 abnormal 25.20Hospitals/Healthcare Facilities 0.57 16.55 25.00 16.56Hotel/Gaming 0.78 12.08 abnormal 30.44Metals & Mining 1.12 6.32 17.98 11.05Oil/Gas Distribution 0.83 8.89 32.28 16.83Packaging & Container 0.70 6.56 abnormal 19.34Power 1.31 8.16 abnormal 16.20Publishing & Newspapers 0.84 11.02 20.66 13.69Real Estate (Development) 0.98 10.64 abnormal 17.63Retail (FMCG) 0.90 9.50 22.00 17.00Software (IT) 0.97 11.24 20.00 16.00Steel 0.82 5.64 22.37 11.27Telecom 1.08 9.33 16.11 14.51
Difference in valuation of Developed and Developing countriesIndia projected to grow at fastest rate
Source:- For PE Research Affiliates, LLC dated 31.03.2015;For GDP Growth world bank June-2015
Developed Countries
Developing Countries
GDP Growth Rate Country PE 2014 2015F 2016F 2017F
United States 26.90 2.40 2.70 2.80 2.40 United Kingdom 12.70 2.80 2.60 2.60 2.20 Japan 26.80 - 1.10 1.70 1.20
Average 22.13 2.60 2.13 2.37 1.93
GDP Growth Rate
Country PE 2014 2015F 2016F 2017F
India 20.50 7.30 7.50 7.90 8.00 China 14.60 7.40 7.10 7.00 6.90 Indonesia 21.50 5.00 4.70 5.50 5.50 Mexico 21.50 2.10 2.60 3.20 3.50 Russia 4.90 0.60 (2.70) 0.70 2.50 Brazil 8.90 0.10 (1.30) 1.10 2.00
Average 15.32 3.75 2.98 4.23 4.73
Start up and Digital retail Valuation matrixStart up valuation is more about understanding
Promoters and Management, future potential of
business, People, Technology, Competitive
landscape, Traction and the chances of success and
failure attached.
Indian digital retail and e-commerce companies
and their valuations are being closely linked to
the soaring valuation of US tech start-ups and
investors are under the fear of missing out.
The online retail companies rely on a different
metric of valuations – “GMV” which is defined to
indicate total sales value for merchandise sold
through a marketplace over a period.
However, GMV is not reflected on their
financial statements and their actual
revenues are just a fraction of GMV.
The GMV or sales (as per
financial statement) is
then multiplied by a
Multiple (x times) to get
the Valuation of the entity
Some popular valuation methods for Start up
Venture Capitalist MethodThe VC must own 12.44% of company to realize a
20% annual return on the investment in 5 years.
Investment $1.0 millionRequired IRR 20%Term 5 yearsRevenues $ 1 millionYear 5 Net Income $2 millionYear 5 P/E Ratio – Exit Multiple 10x
In multi stage DCF model discount rate is applied depending upon the stage of operations and inherent risk
of the model at that stage. (Like Pre development and post development of a product)
First Chicago Method
Adjusted (Multi-stage) Discounted Cash Flow Method
Particulars Success Survival FailureBase Year Revenue $ 1 mn $ 1 mn $ 1 mnRevenue Growth Rate 100% 50% 5%Revenue Level after 5 year 32.00 7.59 1.28After Tax Profit Margin 20% 10% NegativeNet Income at Liquidity 6.40 0.76 0.00Value of company at a PE Multiple of 10 64.00 7.59 1.00 (Projected Liquidation Value)
PV of company using discount rate 20% 25.72 3.05 0.40Probability 33.33% 33.33% 33.33%Expected PV under each scenario 8.57 1.02 0.13Overall Expected PV 9.72% Ownership in order to invest $1.0 Mn 10.28%
Thanking YouChander SawhneyPartner & Head – Valuation & DealsCorporate Professionals Capital Private LimitedMob. +91 9810557353E-Mail: chander@indiacp.comWebsite: www.corporateprofessionals.com
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