Corporate valuation

WHAT & WHY

Value & Valuation

 Value is*
 An Economic concept;
 An Estimate of likely prices to be concluded by the buyer and seller of a good or service
that is available for purchase;
 Not a fact.

 Valuation is the process of determining the “Economic Worth” of an Asset or Company

under certain assumptions and limiting conditions and subject to the data available on the
valuation date.
Beauty lies in the eyes of the
beholder,

Value lies in the pocket of the

buyer
Key Facts

PRICE IS NOT THE SAME AS VALUE

VALUE VARIES WITH PERSON, PURPOSE AND TIME

TRANSACTION CONCLUDES AT NEGOTIATED PRICES

VALUATION IS HYBRID OF ART & SCIENCE

S Standard of Valuation

T Thesis of Valuation

E Economics of Valuation

M Methodologies of Valuation
Standard of Thesis of Valuation Economics of Methodologies of
Valuation Valuation Valuation

Standard of Value is the hypothetical conditions under which a business is valued.

While selecting the Standard of Value following points is to be taken care of

 Subject matter of Valuation;

 Purpose of Valuation;

 Statute;

 Case Laws;

 Circumstances.

Types of Standard of Value:

FAIR MARKET VALUE INVESTMENT VALUE

INTRINSIC VALUE FAIR VALUE

Standard of Thesis of Valuation Economics of Methodologies of
Valuation Valuation Valuation

Thesis of Value is Premise of value which relates to the assumptions upon which
the valuation is based.

Premise of Value

 Going Concern – Value as an ongoing operating business enterprise.

 Liquidation – Value when business is terminated . It could be ‘forced’ or ‘orderly’.

Value-in-use

Value-in-exchange
Standard of Thesis of Valuation Economics of Methodologies of
Valuation Valuation Valuation

Valuation across business cycle follow the law of

economics Turnover/Profits: Drops 

 Proven Track Record: Substantial

Operating History
Declining `  Method of Valuation: Entirely
Cos. from Existing Assets
 Cost of Capital: N.A.
 Turnover/Profits: Saturated
Turnover / Profits

Mature  Proven Track Record: Widely Available

Cos.  Method of Valuation: More from Existing Assets
 Cost of Capital: May be High
 Turnover/Profits : Good
 Proven Track Record: Available
 Valuation Methodology: Business Model with Asset Base
High Growth  Cost of Capital: Reasonable
Cos.
 Turnover/Profits: Increasing still Low
 Proven Track Record: Limited
Growing  Valuation Methodology: Substantially on Business Model
Cos.  Cost of Capital: Quite High

 Turnover/Profits: Negligible Time

Start Up  Proven Track Record: None
Cos.  Valuation Methodology: Entirely on Business Model
 Cost of Capital: Very High
Standard of Thesis of Valuation Economics of Methodologies of
Valuation Valuation Valuation

Valuation Approaches

Income Based Market Based Asset Based

Other Methods
Method Method Method

Capitalization of Comparable Contingent Claim

Earning Method Companies Market Book Value Method Valuation
Multiples Method
(Historical) (Option Pricing)
(Listed Peers)

Discounted Cash
Flow Method Comparable Liquidation Value Price of Recent
(Projected Transaction Multiples Method Investment Method
Time Value) Method
(Unlisted Peers)

Rule of Thumb
Market Value Method Replacement Value (Multiples:
(For Quoted Method Customers, Rooms,
Securities) Seats, No. of
visitors etc.) -
Depends upon
Industry
 Need of several valuation methods?

Each has strengths and weaknesses

Different methods useful in different situations

Each gives a different “take” on the value of the

company’s stock

Provides a range of valuations instead of point

estimates

While concluding Value, all the methodologies must be considered and then weights applied
as per the facts of the case. In other words, Value conclusion should be based on the
Professional Judgement and Simple Average should best be avoided while concluding
Value.
 Sources of Information for Valuation

Historical financial results –

Sources of Income Statement, Balance
Information Sheets and Cash Flows
Data available in Public
Domain – Stock Exchange /
MCA/SEBI/Independent Report

Data on comparable
companies – SALES/EBITDA/
PAT

Promoters and Management

background

Data on projects
Discussion and
planned/under
Representation with/by Industry and Regulatory
implementation
the management of the trends
including future
Company
projection
 Key drivers of valuation

CASH FLOW
Investor assign value based on the cash flow they expect to receive in the
future
- Dividends / distributions That’s why DCF is most
- Sale of liquidation proceeds
Value of a cash flow stream is a function of prominent valuation method
- Timing of cash Receipt
- Risk associated with the cashflow

ASSETS
Operating Assets
- Assets used in the operation of the business including working capital, Property, Plant &
Equipment & Intangible assets
- Valuing of operating assets is generally reflected in the cash flow generated by the
business
Non - Operating Assets
- Assets not used in the operations including excess cash balances, and assets held for
investment purposes, such as vacant land & Securities
- Investors generally do not give much value to such assets and Structure modification
may be necessary
Need for Restructuring
 Valuation depends upon

Dispute Value
Purpose Regulatory Accounting Creation
Resolution

• Mergers • RBI • ESOP • Company Law • Equity Research

• Income Tax Board/ Courts
• IPO • Purchase Price • Credit Rating
Allocation • Arbitration • Corporate
• Acquisitions / • SEBI
Investment • Impairment / • Mediation Planning
• Stock Exchange Diminution
• Voluntary
Assessment • Companies Act
 Choice of Valuation Approaches

“Value in Valuation is a question,

and
Your choice of Method is the first step
towards answer”

Applicability of a particular approach depends upon:

On whose behalf? – one buyer vs another buyer, buyer vs seller;

For what purpose? – independent strategic acquisition, group company consolidation, cross
border transaction;

When? – distress situation, industry downturn, boom etc;

 Choice of Valuation Approaches

• In General, Income Approach is preferred;

The dominance of profits for valuation of share was emphasised in “McCathies case” (Taxation,
69 CLR 1) where it was said that “the real value of shares in a company will depend more on the
profits which the company has been making and should be capable of making, having regard to
the nature of its business, than upon the amount which the shares would realise on liquidation”.
 

• However, Asset Approach is preferred in case of Asset heavy companies and on

liquidation;

• Market Approach is preferred in case of listed entity and to evaluate the value of
unlisted company by comparing it with its listed peers;
 Chapter overview
• Context of valuation
• Approaches to valuation
• Features
• CV in practice
• Importance of knowing intrinsic value
Basic Concept Business Valuation is the process
of determining the "Economic Worth" of a
Company based on its Business Model and
External environment and supported with
reasons and empirical evidence.

Corporate valuation depends upon

• Purpose of valuation
• Stage of Business
• Past financials
• Expected financial results
• Industry scenario
Corporate valuation
Corporate valuation is otherwise
known as business valuation

Business valuation is a process and a set of

procedures used to estimate the economic
value of an owner's interest in a business

Valuation is used by financial market

participants to determine the price they
are willing to pay or receive to effect a sale
of a business
Corporate valuation is done in the following
situations:

i. Raising capital for a Nascent Venture

ii. Initial public offering
iii. Acquisitions
iv. Divestitures
v. PSU Disinvestment
vi. Employee Stock Option Plans
 Approach to Valuation
• Book value approach
• Stock and debt approach
• Discounted free cash flow method
• Relative Valuation (Comparable company
market multiple method)
• Option value approach
 Features of the valuation Process

The bias in valuation

• Not random
• Current market price
•Avoid pre commitments
• Delink valuation from reward/punishment
• Diminish institutional pressures
• Increase self awareness

Uncertainty in valuation
• Estimation uncertainty – translation
• Firm specific uncertainty- future
• Macroeconomic uncertainty- int rate
Better valuation models, probabilistic statement
• Valuation complexity
• Overload inf, complex model
 Corporate valuation in practice

• Very broadly, the investment banking industry

employs three basic valuation methods for
enterprise valuation:

• Relative valuation
• Transaction multiples
• Discounted cash flow valuation