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Company Analysis of Madras Rubber Factory (MRF) Limited

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Company Analysis of Madras Rubber Factory (MRF) Limited International Journal of Research in Engineering, Science and Management 495 Volume-1, Issue-12, December-2018 www.ijresm.com | ISSN (Online): 2581-5792 Company Analysis of Madras Rubber Factory (MRF) Limited Kunal Madhav Vispute Student, Department of Finance, Jamnalal Bajaj Institute of Management Studies (JBIMS), Mumbai, India Abstract: This research paper aims at valuation of MRF Ltd. depends on above all the possibility to generate future income, The valuation has been performed using Free Cash Flow Models in the form of cash flow and the availability of the assets it empowered with deep fundamental analysis, past financial possesses. Other factors that influence the value are, for performance, management performance, strategies adopted and various macroeconomic factors associated to it. The Tyre Sector instance, level of competition, difference and maturity of the has been analysed in detail that holds a strong positive uphold in company’s products, how long the company has existed, the upcoming time. Various tools have been incorporated in this environment opinion and so on. study that takes into consideration both quantitative and qualitative factors into the consideration. These factors have finally helped in making proper assumptions followed by determining an optimal capital structure that will help in the valuations of MRF effectively. The report will help an investor to gain deep insights about MRF and will help in making the investment decisions in the company. Keywords: Ace Equity, Annual Reports, Industry Reports 1. Introduction Fig. 1. Business Valuation Process Valuation is not an objective exercise, and any Business valuation aims to determine an intrinsic value, on preconceptions and biases that an analyst brings to the process the basis of existing information about a business and its will find their way into value”. Damodaran. The last decade environment. To achieve a reliable valuation, the appraiser demand for valuation services has grown dramatically. should accomplish an accurate business analysis before Globalization and thus capital and trade border relaxations have determining the final value. The quantitative method that is favored business growth. Business introduction on the stock always used to obtain the company’s value, should be exchange occurs not only on local stock markets but also complemented by qualitative method, i.e. the appraiser should internationally. Business valuation is not a precise science, the analyses the company, its industry, competitors, products, value of a company determines subjectively. There is no right research, human resources, marketing etc. to understand how way to estimate the value since there are many factors that all these aspects come together to create the value for the influence it. The value is in the eye of the beholder, any price business. can be justified if there are others who are willing to pay that A. Objectives price. The best standard of value is the market value. "Fair market value is the price at which the property would change To estimate the value of the shares of the companies hands between a willing buyer and a willing seller, neither belonging to the tyre sector by Free Cash Flow Models being under any compulsion to buy or sell and both having and perform their fundamental analysis reasonable knowledge of the relevant facts". However, Estimating the future Balance sheets and Profits & applying of “fair value” requires a perfect market without Loss statements which will be hence used for the external and internal disturbance which is impossible to achieve valuation. in reality. Prerequisites vary for each particular case in regard Analysis of various quantitative and qualitative to access to information, purpose and time available for measures for the proper assumption making. valuation. Complete business valuation requires knowledge To help an investor to analyze the companies and help about many economic theories and understanding of the in decision making on whether to invest in that stock particular company’s operation. or not. Thus, it requires comprehension of national economics, marketing, management, accounting and others, since the 2. Review of literature company’s value is determined by many factors. The value The basic models for valuation are based on discounted cash International Journal of Research in Engineering, Science and Management 496 Volume-1, Issue-12, December-2018 www.ijresm.com | ISSN (Online): 2581-5792 flows. The main method uses the free cash flow for valuation. 3. Methodology Different models uses different premises, and an overall truth is The various tools and analysis used are as follows:- that if the required premises are real and correct, the value will be appropriately accurate. All the methods originates from the A. Fundamental analysis & assumption making premise that the value of an asset is the present value of its At the company level, fundamental analysis involves future cash flows. Valuation models and techniques should be examination of financial data, management, business concept adapted to the rapidly changing world, but the basic statements and competition. As with most analysis, the goal is to derive a remain the same. On the other hand there is a need for more forecast and profit from future price movements. By believing accurate models in order to help investors get as many that prices do not accurately reflect all available information, information as they could. Today information is one of the most fundamental analysts look to capitalize on perceived price important resources and financial models should keep up with discrepancies. Fundamental analysis determines the health and this trend. The DCF-model use future cash flow and discount it performance of an underlying company by looking at key at a present value and relate also to dividends and accounting numbers and economic indicators. The purpose is to identify earnings. The free cash flow to firm is the free money that fundamentally strong companies or industries and remains after paying the operational costs and taxes, meeting fundamentally weak companies or industries. Investors go long the working capital need, and fulfilling the capital reinvestment. on the companies that are strong, and short the companies that The free cash flow to firm can be determined using the net are weak. It includes the qualitative and quantitative income or the EBIT. The main goal of calculating the free cash information that contributes to the economic well-being and the flow is to define the amount of money which can be freely used subsequent financial valuation of a company, security or by the debt and equity owners. Thus the earnings before interest currency. Once the fundamental analysis is complete, then the and taxes are corrected by some items in order to calculate the assumptions have to be made with respect to various parameters free cash flow. Such items are depreciation, amortization and like sales, costs, taxes etc. This will help in taking the views of all the other costs that were subtracted from the income in order the fundamental analysis done and will help in predicting the to calculate profit, but did not involve actual cash outflows. future Balance Sheets and Profit & Loss Statements. The Another item that should be taken into consideration is the so various tools used are: called capital expenditures, those investments that are B. Industry analysis necessary for the business. The type of the investments depends on the activity of the firm. According to Damodaran one of the Industry analysis is a tool that facilitates a company's most useful approach to value a firm is using the free cash flow understanding of its position relative to other companies that to firm. On the same basis for the valuation of equity free cash produce similar products or services. Understanding the forces flow to equity should be used. He wrote down that the value of at work in the overall industry is an important component of a firm is equal to the free cash flow to firm (FCFF) discounted effective strategic planning. An industry analysis consists of by the weighted average cost of capital (WACC). This is the so three major elements: the underlying forces at work in the called intrinsic valuation, more precisely the discounted cash industry; the overall attractiveness of the industry; and the flow approach (Damodaran, 2013). There are cases when the critical factors that determine a company's success within the free cash flow to equity could not be calculated, for example in industry. the case of financial service firms. In these cases not the cash C. DuPont analysis flows, but the dividends will be discounted for calculating The DuPont equation captures the impact of five major value. factors on profitability. A. Data to be collected Tax liability (1- PAT/PBT is the rate of tax) Standalone and Consolidated Balance Sheets and Cost of borrowings (1-PBT/PBIT is the share of profit and loss statements of the companies. operating profit used for paying interest) Past share prices of the companies. Operating Profit Margin(PBIT/Net Sales) Annual reports and other set of valid reports available. Total Assets Turnover (Net Sales/Average Total Industry Reports Assets) Financial Leverage B. Sources of data ROE= (PAT/PBT)*(PBT/PBIT)*(PBIT*Net Sales)*(Net Ace Equity Sales/Average Total Assets)*(Average Total Assets/Average Annual Reports Equity) Industry Reports D. Ratio analysis Company website A ratio analysis is a quantitative analysis of information Research Papers. contained in a company’s financial statements. Ratio analysis is used to evaluate various aspects of a company’s operating and International Journal of Research in Engineering, Science and Management 497 Volume-1, Issue-12, December-2018 www.ijresm.com | ISSN (Online): 2581-5792 financial performance such as its efficiency, liquidity, The general idea behind CAPM is that investors need to be profitability and solvency. Ratio analysis involves evaluating compensated in two ways: time value of money and risk.
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