Business valuation: Relative valuation methods – Issues and challenges Latha S Chari.
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Transcript of Business valuation: Relative valuation methods – Issues and challenges Latha S Chari.
Business valuation: Relative valuation methods – Issues and challenges
Latha S Chari
What we will cover?Basic valuation conceptsPurpose of valuationMethods of valuation – Trading
comparables, Transaction comparables and DCF method of valuation using MS excel financial model
Valuation: Meaning, ConceptMeaning: ascertaining value – real,
intangible and financial assetsValue – 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
Why Valuatio
n ?
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
- =
EV & Balance Sheet - a comprehensive picture
Cash +Cash
equivalents +
Non controlled Investments +
Non-core assets +
Enterprise value (net operating assets: EV)
FinancialInvest-Ments, Invt in associates
-
Debt (MV)Preference
SharesMinority
interest (MV –PE)
Ordinary Equity value
=Land banks
Valuation Methods
Asset based
Earning based
Market price basedMar
ket Price/Pri
ce multiples
Market Co
mparables / transaction
multiple
DDM
DCF
Economic profit
EV Multiples
Net Asset
Replacement value
Liquidation value
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
Asset based method – Replacement value, Liquidation value
Replacement value = Replacement cost of assets - External liabilities
Liquidation value = Sale value of assets – External liabilities.
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.
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
Multiple based methodBased on linking VALUE/PRICE with its DRIVERS.Multiple ratio of what you pay/what you get.
Earnings
•EBIT•EBITDARe
venue
•Sales•Sales growth
Non
Financial
•Employees•Production quantity etc.
Enterprise value or Price of equity
Most popular multiplesPrice 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 sharePrice 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
Understanding the multiplesDefine – understand its calculationDescribe – cross section distributionAnalyse – drivers of the multiplesApply – easily said than done
Understanding multiples – an exampleMean 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
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.
Relative valuation an example – Basic facts
Company Name Abbott India Ltd
Astrazeneca Pharma India Ltd Lupin Ltd Merck Ltd
Abbott India Ltd
Astrazeneca Pharma India Ltd Lupin Ltd Merck Ltd
YYYYMM 200502 200503 200503 200503 201002 201003 201003 201003BSE_Close_Price 645.25 294.21 55.31 428.65 904.4 860.6 324.91 621.95
Quarter Period 1 1 4 1 1 1 4 1Sales 417.06 196.0908 1185.92 367.1156 821 414.1109 3641.08 480.4059PBIDT 94.55 50.3198 145.79 108.2103 122.48 86.4423 818.61 113.0119PBIT 79.35 45.8146 85.27 99.6353 113.27 80.4515 708.66 105.388PAT 60.17 28.38 84.36 66.0118 75.24 52.9568 648.93 72.2348Yearly_EPS 43.1 11.352 4.1 38.96 55.01 21.18 15.108 43.41Market_Cap 985.94 735.53 2220.14 722.76 1237.22 2151.50 14448.75 1032.40
NO OF SHARES 1.53 2.50 40.14 1.69 1.37 2.50 44.47 1.66EV_calculated 988.13 735.53 2660.78 722.76 1237.22 2151.50 15355.56 1032.40BookValue 123.22 38.21 24.94 147.2 198.51 57.81 56.90 281.50DEBT 2.19 0 440.64 0 0 0 906.81 0ROE 0.3196 0.2970 0.1686 0.2660 0.2771 0.3664 0.2564 0.1546Margin 0.19 0.23 0.07 0.27 0.14 0.19 0.19 0.22
Relative valuation an example – Basic facts
Company Name YYYYMMBSE_Close_Price PE PBV
Mcap_sales EV_sales EV_PBIDT EV_PBIT
Abbott India Ltd 201002 904.4 16.44 4.56 1.51 1.51 10.10 10.92Astrazeneca Pharma India Ltd201003 860.6 40.63 14.89 5.20 5.20 24.89 26.74Lupin Ltd 201003 324.91 21.51 5.71 3.97 4.22 18.76 21.67Merck Ltd 201003 621.95 14.33 2.21 2.15 2.15 9.14 9.80
Median 18.97 5.13 3.06 3.18 14.43 16.30Mean 23.23 6.84 3.20 3.27 15.72 17.28harmonic 19.83 4.37 2.54 2.57 13.25 14.43
Relative valuation - projections
Company Name YYYYMMBSE_Close_Price actual Yearly_EPS BookValue Sales PBIDT PBIT
Lupin Ltd 201103 415.35 18.158 70.6558 4420.86 975.6 845.63
Company Name YYYYMM PE PBV Mcap_sales EV_sales EV_PBIDT EV_PBITLupin Ltd Median 201103 344.5160182 362.6654696 304.0658063 296.0536 296.1737516 289.4812687Lupin Ltd - Mean 201103 421.7490029 483.3298783 318.608818 304.40696 324.5031637 308.2489189
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
Issues & ChallengesHow 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
Thank You.