1. 1

2. ◦ Sales Multiple
◦ P/E multiple
◦ Price to Book multiple
◦ Enterprise value to EBIT multiple
2

3.  If valuation is being done for an IPO or a takeover,
◦ Value of firm = Average Transaction P/E multiple × EPS of firm
◦ Average Transaction multiple is the average multiple of recent
transactions (IPO or takeover as the case may be)
 If valuation is being done to estimate firm value
◦ Value of firm = Average P/E multiple in industry × EPS of firm
 This method can be used when
◦ firms in the industry are profitable (have positive earnings)
◦ firms in the industry have similar growth (more likely for “mature”
industries)
◦ firms in the industry have similar capital structure
3

4.  The application of this method is similar to that
of the P/E multiple method.
 Since the book value of equity is essentially the
amount of equity capital invested in the firm, this
method measures the market value of each
rupee of equity invested.
 This method can be used for
◦ companies in the manufacturing sector which have
significant capital requirements.
4

5.  This multiple measures the enterprise value , that is
the value of the business operations (as opposed to the
value of the equity).
 In calculating enterprise value, only the operational value
of the business is included.
 Generally Value from investment activities, such as
investment in treasury bills or bonds, or investment in
stocks of other companies, is excluded.
5

6. A B C
Enterprise market value/sales 1.4 1.1 1.1
Enterprise market value/EBITDA 17.0 15.0 19.0
Enterprise market value/free cash flows 20 26 26
Application to XYZ Co.
Sales Rs. 200 crores
EBIDTA Rs. 14 crores
Free cash flow Rs. 10 crores
6

7. A B C Average
Enterprise market value/sales 1.4 1.1 1.1 1.2
Enterprise market value/EBITDA 17.0 15.0 19.0 17.0
Enterprise market value/free cash flows 20.0 26.0 26.0 24.0
Application to XYZ Co. Average Value
Sales Rs. 200 crores 1.2 Rs. 240 crores
EBIDTA Rs. 14 crores 17.0 Rs. 238 crores
Free cash flow Rs. 10 crores 24.0 Rs. 240 crores
7

8. D E F
Enterprise market value/sales 2.6 1.9 0.9
Enterprise market value/EBITDA 10.0 21.0 4.0
Enterprise market value/free cash flows 21.0 30.0 24.0
Application to PQR Co.
Sales Rs. 300 crores
EBIDTA Rs. 15 crores
Free cash flow Rs. 7.5 crores
8

9. D E F Average
Enterprise market value/sales 2.6 1.9 0.9 1.8
Enterprise market value/EBITDA 10.0 21.0 4.0 11.7
Enterprise market value/free cash flows 21.0 30.0 24.0 25.0
Application to PQR Co. Average Value
Sales Rs. 300 crores 1.8 Rs. 540 crores
EBIDTA Rs. 15 crores 11.7 Rs. 175.5 crores
Free cash flow Rs. 7.5 crores 25.0 Rs. 187.5 crores
Can this be used as a dependable guide
for valuation
9

10.  Using fundamentals
◦ Valuation related to fundamentals of business being
valued
 Using comparables
◦ Valuation is estimated by comparing business with a
comparable fit
10

11.  Using fundamentals for multiples to be
estimated for valuation
◦ Relates multiples to fundamentals of business being
valued, eg earnings, profits
◦ Similar to cash flow model, same information is
required
◦ Shows relationships between multiples and firm
characteristics
11

12.  Using Comparables for estimation of firm value
◦ Review of comparable firms to estimate value
◦ Definition of comparable can be difficult
◦ May range from simple to complex analysis
12

13.  Simple and easy to use
 Useful when data of comparable firms and
assets are available.
 Require less time and efforts
 Easier to justify and sell.
 Closer to the market value (more value if the
comparable firm is getting more in the market)
13

14.  Easy to misuse
 Selection of comparable can be subjective
 Errors in comparable firms get factored into
valuation model
 RGC (Risk, Growth, Cash Flow) may be
ignored.
 Have a short shelf life (compared to
fundamentals).
14

15.  I) Select the relevant measure and value drivers.
 II) Identification of the “COMPS”.
 III) Select and calculate appropriate multiple –
aggregation of multiple into single number through
analysis of “COMPS”.
 IV) Apply to the company
 V) Make final adjustments for non-operating
assets, Contingent liabilities and convertibles.
15

16.  Equity multiple or entity multiple ?
 Which value driver/ multiple to use?
 Trailing multiple or forward looking multiple?
 More number of multiples vs. less multiples ?
16

17.  Matching principle – numerator and denominator should
have consistent definition
 Capital structure – equity multiple is greatly affected by
the capital structure than entity multiple
 Difference in earning guidance and investment and
payout policy
 Enterprise value most of the requires approximation of
debt value
 Stage of business life cycle
 Empirical research supports forward looking multiples
processing two years analysts forecast
17

18.  Use industry classification system or at least list
firm’s competitors
SIC: Standard Industrial classification
GICS: Global industry classification
benchmark
 Size and region
 Number of comparables- 4 to 8 ideal size
( plus or minus 2
18

19.  Management Style
 Size
 Product & Customer diversification
 Technology
 Key Financial trends
 Strategic & operational strategies
 Market positioning & maturity of operation
 Geographical consideration
 Trading volume of selected companies
 Price volatility (σ)
 Distribution of multiples – across the sector & market
19

20.  P/E (Price Earning Ratio)
 P/B (Price to Book Ratio)
 Equity / Sales
 Equity / Cash flow
 Equity / PAT
 Equity / Book value of share
20

21.  MVIC / Sales
 MVIC / EBITDA
 MVIC / EBIT
 MVIC / Book value of invested capital
 MVIC/TA
21

22.  PER – most commonly used multiples
 Make sure definition is consistent & uniform
 PER = MPS / EPS
 Variant of PER
 Current PER = Current MPS / Current EPS
 Some analyst may use average price over last 6m or a year
 Trailing PER = Current MPS / EPS based on last 4 quarters.
 [or, LTM: Last twelve months]
 Forward PER = Current MPS / expected EPS during next F/Y
 EPS may further be based on fully diluted basis or primary basis
 EPS may include or exclude extraordinary items
22

23.  For Growth Company forward PER will consistently give
low value than trailing PER
 Bullish valuer use forward PER to conclude that stock is
undervalued.
 Bearish valuer will consider Current PER to justify that
Stock is overvalued.
 Full Impact of dilution may not occur during next year
leading to lower EPS.
 While using industry PER be careful about outliers
 MLF (money loosing firm) creates a bias in selection
 Equity value is calculated based on existing outstanding
shares but EPS is on fully diluted basis.
23

24.  PEG = PER / expected growth in EPS
 One mistake analyst will make to consider growth in
operating income rather than EPS
 Growth should be consistent with PER calculation
 Never use forward PER for PEG as it amounts to double
counting of growth
 Lower the PEG better the stock
 If PER is high without growth prospect, PEG will be high
– risky firm
 PEG does not consider risk taken in growth and
sustainability of growth.
24

25.  P/B ratio = market value of equity / book value of equity
 Book value is computed from the Financial Statement
 Price of book ratio near to 4 is highly priced stock [mean
P/B ratio of all listed firm in USA during 2006 was 4]
 Price to Sales ratio
 (Revenue multiple) = market value of equity
Revenue
 The larger the revenue multiple better it is.
 Generally there is no sectoral Revenue multiple.
25

26.  MVIC multiple look at market value of operating
assets of the firm (and not only for equity
invested).
 MVIC multiple is not affected by Finance leverage.
 If firms under comparison are differing in their
financial leverage, put more reliance on MVIC
multiple.
26

27.  The market approach is especially relevant if standard of value is
FMV.
 No company is exactly comparable to another, this approach
requires best of extensive guidance that market can provide.
 The subject company need not be exactly in the similar business
but should be impacted by the same economic influences.
 Size difference between two companies can be adjusted for:
 Equity or MVIC multiple can be used for valuing either
controlling or minority interest.
 MVIC multiple is preferable for valuing controlling
interest
and equity multiple for minority interest
27

28.  If MVIC is used to value on a minority interest basis, no
adjustment should be made to the subject company’s
actual capital structure (since minority shareholders
cannot force such an adjustment)
 Equity should be taken on a fully diluted basis (For
options, warrants, convertibles, the no. of equity units
should be computed as if conversion rights were
exercised.
[No. of units of ES O/S = no. of ES after dilution]
28

29.  MVIC = Equity + PS + LTD + current portion of LTID
[or all IBD, i.e. interest bearing debt]
[may also subtract cash or cash equivalent. Marketable
securities are included with cash equivalent]
 This is more preferable because different cash mix
creates problem.
29

30.  MVIC should be on M P basis and it is not book
value.
 Market value of equity multiple can be either on
per share basis or on a total basis.
 Price per share/ EPS or, MV of Equity/PAT
 Round multiple to one decimal
 MVIC should be on a total company basis rather
than on a per-share basis
30

31.  Conceptually only LTD (including current
portion of LTD) should be considered.
 Due to practical difficulty we use AIBL
 [ difficult to assess how much interest is
short term or long term. Some companies
use ST debt as if it is LTD]
31

32. Description of the subject Co. in terms of
Line of business
◦ Market served
◦ Size: Revenue and Asset
◦ Other criteria
I) Then use above information to select guideline Co.
II) Based on definition create a population of companies in similar line of
business
III) Normalize financials of both subject Co. & guideline Co.
IV) Carryout comparative Financial analysis
V) Identify and list similarities and assess relative strength and weakness.
[site visit and management interviews helps]
32

33. VI) Gather industry & economic date. Identify positions of
subject Co. in industry. Assess how economic factor will
affect both.
 VII) Choose what multiple's to rely on and the appropriate
value for each multiple.
 Two factors that influence selection of multiples of operating
variables are
 Growth prospects of subject company relative to guideline
 Risk
33

35. Industry Best measure of value
Auto Price to Earnings (PE) multiple
Banking PE and Price to Book Value (PBV) or
Adjusted PBV multiple
Cement PE, Enterprise Value to Earnings
before interest, tax, depreciation &
amortisation (EV/EBITDA), EV/tonne
Engineering Forward PE, which reflects the order
book position of the company

36. Industry Best measure of value
FMCG PE, Return on Equity (RoE) and Return
on Capital Employed (RoCE) ratios
Real Estate Net asset value (NAV), which is book
value at market prices. Also look at debt
levels
Telecom PE and DCF, because there is a future
stream of cash flows for upfront heavy
investment
Oil & Gas Residual reserves of energy assets
Technology Trailing PE and its growth

38. Industry Factors Impacting
Auto Volume growth, realisations, operating
profit margins, new product launches
Banking Loan growth, non-performing assets,
net interest margins, CASA ratio
Cement Dispatches, operating costs, regional
demand supply equation
Engineering Order book inflows, execution skills,
margins
FMCG RoE, RoCE, margins, volume growth,
new products, market share

39. Industry Factors Impacting
Real Estate Debt levels, liquid assets, inventory
levels, promoters’ ability to raise funds
Utilities & Project costs, plant load factors, raw
Power material costs, debt equity ratios
Telecom OPEX , ARPU, TOWERS, debt equity
ratios
Oil & Gas Project costs, debtequity ratios
Technology Order inflow, ability to contain costs,
service verticals, profitability, client
attrition