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Valuations for Re-Organisations

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Valuations for Re-Organisations VALUATIONS FOR RE-ORGANISATIONS CA VIKRAM JAIN 04 MAY 2019 VALUATION CONCEPTS & PURPOSE CA VIKRAM JAIN 2 VALUATION CONCEPTS Value - Price Value varies Not an with Exact Situation science Valuation More of an Subjective Art Date Specific CA VIKRAM JAIN 3 TYPES OF ASSETS Others Securities • Jewellery or Intangible Land and Plant and • Archaeological Business Collections Financial Assets Building Machinery • Drawings Assets • Paintings • Sculptures CA VIKRAM JAIN 4 PURPOSE OF VALUATION Business Valuation Regulatory Intangibles Financial Reporting Purchase Price Restructuring FEMA Purchase / Sale Allocation Purchase / Sale of Private Equity/ Income Tax Act Hypothecation shares / business Venture Capital Funds Litigation / Family Accounting for SEBI Regulations Financial Instruments Settlements purchase Ind AS reporting – Fair Fund raising Companies Act Impairment Value / Impairment CA VIKRAM JAIN 5 PROCESS OF VALUATION CA VIKRAM JAIN 6 STEPS IN VALUATION 1 2 3 4 Information Analysis Valuation Recommendation • Obtaining information • Data Analysis and review Methodologies • Assigning Weights • Business Understanding • Discussion with the • Selection of method • Recommendation Management • Conducting sensitivity • Reporting analysis CA VIKRAM JAIN 7 SOURCES OF INFORMATION Historical data such as audited results of the Company Industry & Company overview Future projections Management Discussion Stock market quotations / announcements Publicly available data on comparable companies Market surveys, news paper reports Representation by Management CA VIKRAM JAIN 8 ANALYSIS OF THE COMPANY Understanding of the Business Industry Analysis Existing policy/ legal framework SWOT Analysis Profitability Analysis Financial Ratio Analysis Projection analysis • Installed capacity • Revenue and Expenses ratio analysis • Capital expenditure – increasing capacities • Working capital requirements • Alternate scenarios / sensitivities CA VIKRAM JAIN 9 VALUATION METHODOLOGIES CA VIKRAM JAIN 10 VALUATION METHODOLOGIES INCOME MARKET COST APPROACH APPROACH APPROACH Market Price Method Net Assets Value Method Discounted Cash Flow Comparable Companies Method Multiple Method Replacement Value/ Comparable Transactions Realizable Value Method Multiple Method CA VIKRAM JAIN 11 INCOME APPROACH CA VIKRAM JAIN 12 DISCOUNTED CASH FLOW (DCF) METHOD 1 2 3 4 Values a business Considers cash flows Value of business is Involves determination based on the expected and not accounting aggregate of of discount factor and cash flows over a profit discounted value of growth rate for period of time the cash flows for the perpetuity explicit period and perpetuity CA VIKRAM JAIN 13 DCF - PARAMETERS • Projections • Free Cash Flow to Firm (‘FCFF’) or Cash Flows Free Cash Flow to Equity (‘FCFE’) • Horizon (Explicit) period • Growth rate for perpetuity Discounting • Cost of Equity • Cost of Debt rate • Debt Equity ratio CA VIKRAM JAIN 14 FCFE V/S FCFF Free Cash Flow to Equity Free Cash Flow to Firm • Discount cash flows to firm • Discount cash flows to equity • Cash flows after considering • Cash flows after considering all expenses and taxes, but all expenses, tax, interest and prior to interest and debt debt additions/re-payments additions/re-payments • Discount rate: Cost of Equity • Discount rate: WACC CA VIKRAM JAIN 15 CASH FLOWS Gross operational cash flows (EBIDTA) Less: Tax FCFF Less: Working capital FCFE requirements Enterprise Less: Capex requirements Value Less: Interest payment & additions/ Equity Value repayment for loans CA VIKRAM JAIN 16 CASH FLOWS Factors to be considered for reviewing projections: Business • Industry/Company Analysis Plan • Dependence on single customer/ supplier Business Working • Existing policy/ legal framework Cycle Capital • Capital expenditure – increasing capacities Capital Depreciation • Working capital requirements Tax Expenditure Amortization • Alternate scenarios / sensitivities CA VIKRAM JAIN 17 DISCOUNTING FACTOR Weighted Average Cost of Capital (WACC) = D E xKd+ x Ke (D + E) (D + E) D = Debt E = Equity Kd = Post tax cost of debt Ke = Cost of equity CA VIKRAM JAIN 18 COST OF EQUITY In CAPM Method, all the market risk is captured in the beta, measured relative to a market portfolio, which atleast in theory should include all traded assets in the market place held in proportion to their market value Ke = (Rf + (β x Erp)) Where, Ke = Cost of Equity Rf = Risk free return Erp = Equity risk premium β = Beta CA VIKRAM JAIN 19 COST OF DEBT Rate at which a firm can borrow money Possible sources of today and will depend information: on the default risk embedded in the firm Current market cost of borrowing incurred by Cost of debt currently comparable companies incurred that have similar credit rating CA VIKRAM JAIN 20 DCF VALUE Future cash flows Enterprise Cash flows for during explicit Value perpetuity period Present value Present value CA VIKRAM JAIN 21 MARKET APPROACH CA VIKRAM JAIN 22 MARKET PRICE METHOD Evaluates the value on the basis of prices quoted on the stock exchange It is prudent to take weighted average of quoted price over a reasonable period • Significant and Unusual fluctuations in the Market Price Thinly traded / Dormant Scrip – Low Floating Stock Regulatory bodies often consider market price as important basis – Preferential allotment, Takeover code CA VIKRAM JAIN 23 COMPARABLE COMPANIES MULTIPLE METHOD Earnings EBITDA Multiple (EV / EBITDA) Based Enterprise Value Revenue multiple (EV / Revenue) PE Multiple Equity Value Asset Based Book Value Multiple Equity Value CA VIKRAM JAIN 24 MARKET MULTIPLES Generally applied in case of unlisted entities Estimates value by relating an element with underlying element of similar listed companies Based on market multiples of Listed Comparable Companies • PE Multiple • EV/EBITDA Multiple • Revenue Multiple • Book Value Multiple • Industry Specific Multiple (in recent comparable transactions) o EV/ Tonne – Cement Manufacturing Companies o EV/ Bed – Hospital Business o EV/ Room Keys – Hotel Business o EV/ Tower – Telecom Tower Companies o % of AUM – Asset Management Companies CA VIKRAM JAIN 25 MAINTAINABLE PROFITS Based on past performance and / or estimates Elimination of material non-recurring/ non operational items Adjustment for capacity recently added Profits of various years averaged (simple or weighted) CA VIKRAM JAIN 26 MULTIPLE Historical multiples enjoyed on the Stock Past and Expected Exchange by the Growth of the listed comparable Earnings companies Performance vis-à-vis Size, Location & Peers Market Share CA VIKRAM JAIN 27 COST APPROACH CA VIKRAM JAIN 28 NET ASSETS VALUE (‘NAV’) METHOD OR CA VIKRAM JAIN 29 REPLACEMENT / REALISABLE VALUE METHOD Replacement value of Realisable value of assets assets • Cost of new asset • Cost of disposal • Similar condition • Tax on sale (STCG, • Equivalent utility LTCG etc.) • Depreciation for • Time required obsolescence CA VIKRAM JAIN 30 COMMON ADJUSTMENTS Market value of the investments Other non-operating surplus assets Surplus cash Contingent liabilities / assets Loan Funds Preference Share Capital ESOPs / Warrants Convertible Instruments Tax Concessions CA VIKRAM JAIN 31 BUSINESS RE-ORGANISATION – VALUATION ASPECTS CA VIKRAM JAIN 32 MERGER / DEMERGER – VALUATION ASPECTS In case of mergers and demergers, a relative valuation needs to be carried out Relative values are determined by • using similar valuation approaches / methods; and • applying similar weightages to values arrived under each approach / method Use of different approach / methods may be appropriate in certain cases, such as: • Merger of an investment holding company into technology company o Investment holding company - asset approach o Technology company - market approach / income approach Share exchange ratio for Merger – valuation of shares of Transferor Co and of Transferee Co Share entitlement ratio for Demerger – valuation of Demerged Undertaking and of Resulting Co Examples: • Merger - IDFC Bank and Capital First • Demerger - Cement Business Division of Century Textiles and Industries Limited into Ultratech Cement Limited CA VIKRAM JAIN 33 MERGER / DEMERGER – VALUATION ASPECTS (…CONT) SHARE EXCHANGE RATIO SHARE ENTITLEMENT RATIO Merger of Co A into Co B Demerger of 'Undertaking X' of Co A into Co B Co A Co B Undertaking X of Co A Co B Valuation Approach Value per share Value per share Valuation Approach Value per share Value per share Weights Weights Weights Weights (INR) (INR) (INR) (INR) Asset Approach 25.00 0% 120.00 0% Asset Approach 10.00 0% 120.00 0% Income Approach 116.00 50% 285.00 50% Income Approach 58.00 50% 285.00 50% Market Approach 120.00 50% 305.00 50% Market Approach 60.00 50% 305.00 50% Relative value per share 118.00 100% 295.00 100% Relative value per share 59.00 100% 295.00 100% Exchange ratio (rounded off) 2.50 Entitlement ratio (rounded off) 5.00 2 (two) equity shares of Co B of face value of INR 10 each fully paid up for every 5 1 (one) equity share of Co B of face value of INR 10 each fully paid up for every 5 (five) equity shares of Co A of face value of INR 100 each fully paid up (five) equity shares of Co A of face value of INR 100 each fully paid up CA VIKRAM JAIN 34 SLUMP SALE – VALUATION ASPECTS Sale of an undertaking will qualify as a slump sale if following conditions are satisfied [Section 2(42C)]: • Sale for a lumpsum consideration • Materials available on record do not indicate item-wise value of the assets and liabilities transferred In case of slump sale, a fair valuation of the Business
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