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Valuation aspects in Foreign Direct Investment and India Competitiveness
1. Valuation aspects in Foreign Direct Investment and India
Competitiveness
July 10, 2015
2.
3. Growing
Cos.
Turnover/Profits: Increasing still Low
Proven Track Record: Limited
Valuation Methodology: Substantially on Business Model
Cost of Capital: Quite High
High Growth
Cos.
Turnover/Profits : Good
Proven Track Record: Available
Valuation Methodology: Business Model with Asset
Base
Cost of Capital: Reasonable
Mature
Cos.
Turnover/Profits: Saturated
Proven Track Record: Widely Available
Method of Valuation: More from Existing Assets
Cost of Capital: May be High
Declining
Cos.
`
Turnover/Profits: Drops
Proven Track Record: Substantial
Operating History
Method of Valuation: Entirely
from Existing Assets
Cost of Capital: N.A.
Turnover/Profits: Negligible
Proven Track Record: None
Valuation Methodology: Entirely on Business Model
Cost of Capital: Very High
Start Up
Cos.
Turnover/Profits
Time
Valuation across business cycle follow the law of economics
5. RBI Valuation Guidelines, Now give flexibility
Particulars Valuation before
April 21, 2010
Valuation before
April 1, 2014
Valuation after
8th
July 2014
Guidelines in Force CCI Guidelines In case of FDI Transactions:
•Listed Company: Market Value as
per SEBI Preferential Allotment
Guidelines
•Unlisted Company: DFCF
In case of ODI Transactions:
No method has been prescribed
In case of FDI Transactions:
•Listed Company: Market Value as per
SEBI Guidelines as applicable
•Unlisted Company: Any international
accepted pricing methodology for
valuation of shares on arm's length
basis
In case of ODI Transactions:
No method has been prescribed
Methods
Prescribed
• Net Assets Value (NAV)
• Profit Earning Capacity
Value(PECV)
• Market Value (in case of Listed
Company)
Discount 15% Discount has been prescribed on
account of Lack of Marketability
No such Discount has been
prescribed
No such Discount has been
prescribed
Historical /
Futuristic
It is based on Historical Values It is based on Future Projections Depends upon method being used
Possibility of
variation in Value
Conclusion
As valuation is more Formulae based,
final values came standardized
As valuation is more dependent on
Assumptions and choice of factors
like Growth Rate, Cost of Capital etc,
value conclusion may vary
significantly.
There is flexibility to choose valuation
methods as per the facts of the case
6. Specimen Valuation multiples (Public markets) in India across Industries
Source:-Damodaran Online Dated: Jan, 2015 (Adjusted)
Industry Beta EV/EBITDA Trailing PE Forward PE
Aerospace/Defense 1.08 23.39 24.41 20.12
Air Transport 0.32 22.53 abnormal 22.44
Apparel 0.66 7.85 abnormal 26.59
Auto & Truck 1.92 8.13 24.42 20.23
Auto Parts 1.11 11.57 35.42 19.76
Chemical (Specialty) 1.08 11.45 21.62 15.10
Coal & Related Energy 0.94 9.78 9.85 8.77
Drugs 0.95 11.48 23.75 19.22
Education 1.19 12.00 abnormal 22.09
Engineering 1.09 15.15 26.00 20.73
Entertainment 0.93 13.95 abnormal 25.20
Hospitals/Healthcare Facilities 0.57 16.55 25.00 16.56
Hotel/Gaming 0.78 12.08 abnormal 30.44
Metals & Mining 1.12 6.32 17.98 11.05
Oil/Gas Distribution 0.83 8.89 32.28 16.83
Packaging & Container 0.70 6.56 abnormal 19.34
Power 1.31 8.16 abnormal 16.20
Publishing & Newspapers 0.84 11.02 20.66 13.69
Real Estate (Development) 0.98 10.64 abnormal 17.63
Retail (FMCG) 0.90 9.50 22.00 17.00
Software (IT) 0.97 11.24 20.00 16.00
Steel 0.82 5.64 22.37 11.27
Telecom 1.08 9.33 16.11 14.51
7. Difference in valuation of Developed and Developing countries
India projected to grow at fastest rate
Source:- For PE Research Affiliates, LLC dated 31.03.2015;
For GDP Growth world bank June-2015
Developed Countries
Developing Countries
GDP Growth Rate
Country PE 2014 2015F 2016F 2017F
United States 26.90 2.40 2.70 2.80 2.40
United Kingdom 12.70 2.80 2.60 2.60 2.20
Japan 26.80 - 1.10 1.70 1.20
Average 22.13 2.60 2.13 2.37 1.93
GDP Growth Rate
Country PE 2014 2015F 2016F 2017F
India 20.50 7.30 7.50 7.90 8.00
China 14.60 7.40 7.10 7.00 6.90
Indonesia 21.50 5.00 4.70 5.50 5.50
Mexico 21.50 2.10 2.60 3.20 3.50
Russia 4.90 0.60 (2.70) 0.70 2.50
Brazil 8.90 0.10 (1.30) 1.10 2.00
Average 15.32 3.75 2.98 4.23 4.73
8. Start up and Digital retail Valuation matrix
Start up valuation is more about understanding
Promoters and Management, future potential of
business, People, Technology, Competitive
landscape, Traction and the chances of success and
failure attached.
Indian digital retail and e-commerce companies
and their valuations are being closely linked to
the soaring valuation of US tech start-ups and
investors are under the fear of missing out.
The online retail companies rely on a different
metric of valuations – “GMV” which is defined to
indicate total sales value for merchandise sold
through a marketplace over a period.
However, GMV is not reflected on their
financial statements and their actual
revenues are just a fraction of GMV.
The GMV or sales (as per
financial statement) is
then multiplied by a
Multiple (x times) to get
the Valuation of the entity
9. Some popular valuation methods for Start up
Venture Capitalist Method
The VC must own 12.44% of company to realize a
20% annual return on the investment in 5 years.
Investment $1.0 million
Required IRR 20%
Term 5 years
Revenues $ 1 million
Year 5 Net Income $2 million
Year 5 P/E Ratio – Exit Multiple 10x
In multi stage DCF model discount rate is applied depending upon the stage of operations and inherent risk
of the model at that stage. (Like Pre development and post development of a product)
First Chicago Method
Adjusted (Multi-stage) Discounted Cash Flow Method
Particulars Success Survival Failure
Base Year Revenue $ 1 mn $ 1 mn $ 1 mn
Revenue Growth Rate 100% 50% 5%
Revenue Level after 5 year 32.00 7.59 1.28
After Tax Profit Margin 20% 10% Negative
Net Income at Liquidity 6.40 0.76 0.00
Value of company at a PE Multiple of
10
64.00 7.59 1.00 (Projected Liquidation Value)
PV of company using discount rate 20% 25.72 3.05 0.40
Probability 33.33% 33.33% 33.33%
Expected PV under each scenario 8.57 1.02 0.13
Overall Expected PV 9.72
% Ownership in order to invest $1.0 Mn 10.28%
10. Thanking You
Chander Sawhney
Partner & Head – Valuation & Deals
Corporate Professionals Capital Private Limited
Mob. +91 9810557353
E-Mail: chander@indiacp.com
Website: www.corporateprofessionals.com