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A Tryst with ValuationGDA Management Consulting

Pvt. Ltd

GDAConsulting

14th September, 2014. Pune

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Why Valuation?Merger/

Demerger

Private Equity

IPO

Family Separation

Portfolio Value of

InvestmentsRegulatory Approval

Litigation

Test of Impairment

Buyback of Shares

Purchase / Sale of

Business

Valuation is essentially for a given purpose.

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What is value?

Value is what you get ; Price is what you pay

–Warren Buffet

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Value drivers

AssetsP&M, Land &

Building, Other Fixed Assets etc.

IncomeRevenues, Cash Flows, EBIDTA,

PAT etc.

IntangiblesBrand,

Intellectual property Rights,

Trademark, Copyrights,

Employee skill etc.

MarketP/E multiples,

Revenue Multiples etc,

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Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted

- Albert Einstien

……..But everything that can or cannot be counted can be necessarily valued

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What is Valuation?

• Skillful application of certain scientific techniques to determine the “value” of a business /asset/ project/company etc.

• A reliable estimate of economic value

ScienceReliabilitySkill

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Valuation considerations• Purpose of valuation

• Background of the Promoters, Management & Company

• Market Conditions- Present & Future

• Element of bias

• Statutory requirements such as Compliance with Income Tax Act, FEMA, RBI Regulations etc.

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Valuation Approaches

Asset Based

Approach

Income Based

Approach

Market Based

Approach

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Methods of ValuationAsset based (Net Asset method)• Book Value• Market Value• Replacement

Value

Income Based• Discounted cash

flow method• Capitalization of

earnings method

Market based • Market mutiples

method

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Net Asset Method

• All Assets (-) Liabilities excluding Reserves and Accumulated Losses

• Book Value Vs. Replacement Value Vs. Market Value Vs. Distress value

• Impact of Off Balance Sheet items

• What about Intangible Assets?

• Involvement of Government registered valuors

• Historical method; does not capture the potential

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Discounted Cash Flow

• Net Present Value of future cash flows discounted by Weighted Average Cost of Capital(WACOC)

• Realistic business plan and estimation of future cash flows

• Relevance of discounting factor

• Terminal Value

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Market Multiples method

• Revenue/EBIDTA/P.E Multiple

• Broader method of valuation

• Takes into consideration, market and competition

• Thumb rule method

• Multiple –a product of micro and macroeconomic factors

• More relevant for large ticket transactions

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IntangiblesSeparately identifiable although not tangible

Can be sold /transferred/licensed/rented seperately

Can be recognised legally

Can arise from a legal/contractual right

Is capable of offering a competitive advantage to its owner

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Recognition of Intangibles for Valuation purpose

Definition of intangible asset + Future economic benefits + Cost can be measured = Recognized as intangible asset

Recognition of an Intangible is a relatively challenging process

Differentiation factor must be established

Significant competitive advantage must be present

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Methods of Intangibles Valuation

Intangibles Valuation

Income

Relief from royalty

Excess Earnings method

Cost

Reproduction Cost Method

Replacement Cost MethodMarket

(Sales Comparison Method)

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Deciding the method of valuation

Is the Company a Going Concern? Is the

Company Capital intensive?

Is the Company listed/unlisted?

Are there Comparable Companies in the Market?

Are there any significant intangibles associated with the Company?

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Valuation- More of an art; less of a science• Valuation is never Precise;

• Uncertainties of;– Assumptions– Firm-specific factors– Macroeconomic factors

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Other Value Drivers

Distress sale

Control Premium

Final Price is a result of negotiations

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Control PremiumStrategic Positioning

Distress Sale

Alternate

opportunity

Emerging markets

Illiquidity Discount

Final Value

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Importance of reliable valuation

Loss of opportunity

Loss of capital

Legal repercussion

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Long lasting negative impact

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Responses to uncertainty

• Better Valuation models

• Combination of two or more methods

• Valuation ranges

• Judgment and skill of valuor

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Case study 1 Brand valuation• Background:

– Brand valuation of one of the top 10 consumer product Brands

– Six product lines; existence of two decades

– Scope extended to understanding the industry, the market, the strategies employed for Marketing, Pricing and Distribution, and last but not the least, competitors; not just logo or registered trademark

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Case study 1 Brand valuation• Methodologies: used

– Brand earning Multiple Method– Terminal value method– Discounted Cash flow method

Discussion of Brand Earning Multiple Method

Brand Value = Average Recurring Annual Brand Earnings * Brand Earning Multiple

Brand Earning Multiple based on Sovereign Earning Multiple P.E multiple and Brand Strength score of the Company

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Case study 1 Brand valuation• Challenges involved:

– Calculation of Brand Strength Score: Scoring of the Brand on 7 different parameters vis-à-vis it comeptitors; 14 in nos; Substantial subjectivity involved

– Since Company under consideration incorporated multi Branding strategy, it was important to remove the effect of multibrands from their revenue.

– Accounting for remuneration of non brand capital while calculating Average recurring Brand earnings

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1.Leadership2. Stability3. Support

4.Internationality5.Protection

6.Trend7.Market

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Case study 1 Brand valuation• Valuation Conclusions

– Detailed discussions with the Company and understanding of operations

– Understanding of Brand and Non Brand Operations– Adopting a “devil’s advocate” perspective while evaluating each

assumption– Justifying the value using two other methods

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Case study 2- Acquisition of a Company • Background:

– Acquisition of a pharmaceutical Company engaged in the manufacture of intravenous fluids

• Challenges Involved– Post mortem exercise– Valuation after the acquisition was carried out– On slump sale basis by offering a lumpsum amount for assets to be

purchased– Valuation done for the acquiring Company– Assesment of Goodwill

• Methodology used:– Involvement of Government Approved Valuors- Civila nd Mechanical– Valuation of Goodwill on the basis of past financials

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Case study 2- Acquisition of a Company • Valuation Conclusions:

• Acquiring Company had negotiated an amount on the basis of WDV of Assets + Premium

• Identification of recently purchased Plant and Machinery which was overvalued in the books

• Acquring Company had paid excess amount for acquiring plant and Machinery

• Ideally Goodwill=Premium

• However, Goodwill was calculated as per widely accepted valuation methods such as Super Profits Method and capitalisation of profits method

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Case study 3- Valuation for seeking Equity• Background

– Valuation of an I.T Company- into niche software development

– Objective was to seek equity infusion of a strategic international Company ins imilar line of Business

• Methodology used: Weighted Average of • Discounted Cash Flow method• Net Assets Method• EBIDTA Multiple method

• Challenges involved• Very niche offerings• Very few comparable Companies• Non linear growth pattern prevalent in , not only the Company , but

also the industry• Calculation of Future projections- difficult

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Case study 3- Valuation for seeking Equity

• Approach to valuation– Detailed discussions with the Company– Trying to understand the investors’ perspective– Strategy involved in such similar transactions studied– Justifying of assumptions for the purpose of valuation proved to be a

real challenge which was successfully addressed

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Takeaways

• Valuation is essentially for a given purpose.

• Value is what you get ; Price is what you pay

• Valuation need not be Precise

• Valuation is a reliable measurement of economic value

• Value changes with perspective

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Need for Valuation

• Comparison with peers: Self Assessment

• Succession planning

• Reduction of cost of capital

• Assess marketability of business

• Strengthen credibility

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About GDA Consulting• Consulting arm of G.D.Apte & Co. Chartered Accountants

• Team comprises Chartered Accountants, Management Professionals, Financial experts from industry, Ex-Bankers, Legal experts, technical experts etc.

• Over three decades of experience in Valuation

• Body of Work comprises– Assistance in setting up new units– Techno Economic Viability studies– Debt syndication/ Arrangement of Private equity– Assistance in Merger/Demerger cases

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GDA Consulting

PuneGDA HousePlot No. 85, Bhusari Colony (Right)Paud Road, Pune - 411 038, IndiaEmail : ranjeet.kulkarni@gdaconsulting.inPhone : +91 20 2528 0081 Fax : +91 20 2528 0275

MumbaiOffice No.83 – 87 ,8th Floor, B Wing ,Mittal Tower, Nariman Point, Mumbai, IndiaPhone : +91 22 4922 0555 BangaloreD-II, 207, Shriram White House, 15th Cross, 6th Main, R.T. Nagar, IInd Block, Bangalore - 560 032Phone : +91 80 2354 2436

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