1.

Valuation of a Target Company

Investors in a company that are aiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth. Naturally, both sides of an M&A deal will have different ideas about the worth of a target company: its seller will tend to value the company at as high of a price as possible, while the buyer will try to get the lowest price that he can. There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. If the acquiring company perceives that it will benefit from the economies of scale that will be created by an acquisition, it may be willing to pay more than would otherwise be expected, known as the "acquisition premium," an added cost to the buyer's shareholders and a windfall to the seller's shareholders. But if the buyer is really just looking to acquire only certain assets or views the acquisition as a short-term tactic, then the price it is willing to pay may not even approach the price given by the appraiser. From the seller's point of view, if the founders or owners are really not very eager to give up the business just yet, the negotiated price may be driven higher. However, if the seller is motivated to sell quickly, the negotiated price could plummet. It is an essential aspect of the valuation process that while detailed methods of valuation can provide a solid starting point that often remains all they provide. The final negotiated price can vary widely and depend on diverse factors, including market conditions, timing of the negotiations and of the valuation date, internal motivation and goals of both buyer and seller, operating synergies that will result from the transaction, the structure of the transaction and other factors that may not even be explicitly defined.

2. Selection of the Firm: J Kumar Infra Projects Ltd.

J Kumar Infra Projects Ltd is a civil engineering and infrastructure development Company with a primary focus on development of flyovers, skywalks, roads, bridges, airport runways, commercial and residential buildings, railway buildings, sports complexes, and irrigation projects. They also undertake the piling of foundation work using hydraulic piling rigs for major real estate and infrastructure companies. We have been most active in Mumbai, Pune, Aurangabad and Vidharbha region of Maharashtra for the infrastructure projects, whereas have been undertaking piling contracts for projects across India. They enjoy various accreditations, such as the QA certification of, ISO 9001:2000 certification for the quality management system we apply in designing and construction of the infrastructure projects we undertake. They have received accolades for some of their projects, such as the 2nd prize for construction of Kokan Bhavan Bridge at CBD Belapur, Rs. 1.9 million of bonuses received for early completion of Aurangabad flyover by 19 days. The key to efficient execution of projects, is their large fleet of owned modern construction equipment and machineries like hydraulic piling rigs, putmiester mobile boom placer concrete pump and stationery concrete pumps, transit mixers, cranes, poclains, front end loaders, JCBs, trucks, tippers, shuttering and centering plates, etc. They also have 5 ready mix concrete plants catering to our in-house requirements.

Analysis of Growth Year 2006-07 2007-08 2008-09 2009-10 2010-11 Net Sales (In Rs. Crores) 112.66 214.24 406.46 762.4 939.75 Growth in Net Sales (%) 390.68 % 90.17 % 89.72 % 87.57 % 23.26 %

Analysis of Profitability Year 2006-07 2007-08 2008-09 2009-10 2010-11 Net Profit (In Rs. Crores) 8.01 19.5 32.93 69.97 73.92 Growth in Net Profit (%) 1012.5 % 143.45 % 68.87 % 112.48 % 5.65 %

Analysis of Capital Structure and Dividend Payouts Capital Structure (J Kumar Infra Projects) Period Instrument Authorized Capital From To (Rs. cr) 2010 2011 Equity Share 40 2009 2010 Equity Share 40 2008 2009 Equity Share 25 2007 2008 Equity Share 25 2006 2007 Equity Share 25 2005 2006 Equity Share 10

Issued Capital (Rs. cr) 27.8 27.8 20.72 20.72 14.22 0.01

-PAIDUPShares (nos) 27801205 27801205 20724420 20724420 14224420 10000 Face Value 10 10 10 10 10 10 Capital 27.8 27.8 20.72 20.72 14.22 0.01

Dividend Payouts Year Dividends Dividend Payouts (%) 2010-11 6.26 8.5% 2009-10 7.06 10% 2008-09 4.14 12.6% 2007-08 3.11 15.95%

J Kumar Infra Projects is a profit making and dividend paying company for past five years and it is a growth oriented organisation having huge growth potential in future. It is listed in BSE and NSE both and it is also a levered company with a Debt Component of around 31 percent.

3. Adjusted Present Value Method

Adjusted Present Value (APV) is a business valuation method. APV is the net present value of a project if financed solely by ownership equity plus the present value of all the benefits of financing. It was first studied by Stewart Myers, a professor at the MIT Sloan School of Management and later theorized by Lorenzo Peccati, professor at the Bocconi University, in 1973. The method is to calculate the NPV of the project as if it is all-equity financed (so called base case). Then the base-case NPV is adjusted for the benefits of financing. Usually, the main benefit is a tax shield resulted from tax deductibility of interest payments. Another benefit can be a subsidized borrowing at sub-market rates.. Technically, an APV valuation model looks pretty much the same as a standard DCF model. However, instead of WACC, cash flows would be discounted at the unlevered cost of equity, and tax shields at either the cost of debt or following later academics also with the unlevered cost of equity. APV and the standard DCF approaches should give the identical result if the capital structure remains stable. Adjusted present value refers to the net present value (NPV) or investment adjusted for the interest and tax advantages of leveraging debt provided that equity is the only source of financing. How does it Work? A company may finance a project or investment using shareholders' equity alone (i.e., without leveraged, or borrowed, cash flows). Under these circumstances, the company repays associated debts using the unleveraged cash flow from shareholder's equity. As a result, the company is entitled to significant tax deductions on the interest component of these payments. These tax deductions put the company at an advantage as far as the project's ultimate profitability, because they help to increase the project's bottom line. For this reason, a company can analyze such a project's profitability using the adjusted present value (APV). This measure reflects the project or investment's NPV adjusted for the tax benefits from interest obligations on outstanding debts associated with the project or investment. How does it matter? The APV measures the profitability of a project or investment in which tax deductions apply on the basis of debt financing through an un-leveraged equity cash flow. For this reason, the APV can be a useful measure for investments and projects with high levels of debt that would be transferred to the acquiring company if accepted.

4. Analysis for Enterprise Valuation

Assumptions for Financial Projections Particulars Growth in Net Sales Based on CAGR EBIDTA as a Percent of Sales Depreciation & Amortisation as a percent of Sales Interest as a Percent of Sales Tax (%) 2010-11 23.26% 2009-10 87.57% 2008-09 89.72% 2007-08 90.17% 2006-07 390.68% Projections 25%

16.11 %

17.62 %

16.90 %

20.26 %

16.18 %

18%

10 % 11.38 % 13.78% 12.03% 13.81% 10.79% 2% 2.95 % 30.8994 1.94 % 33.4317 1.96 % 32.6652 3.61 % 34.0994 2.70 % 34.1283 30%

Calculation of the Growth Rate The growth rate is calculated on the basis of CAGR for past 5 years. Following formula has been used: CAGR: = ((End Value/Start Value) ^ (1/ (Periods - 1)) -1 Growth Rate on CAGR is taken as 25 %

Projections for the Analysis Income Statement Particulars Net Sales EBITDA Depreciation EBIT Interest PBT Tax PAT Assumptions 2011-12 2012-13 2013-14 2014-15 2015-16 25 % 1174.69 1409.63 1691.55 2029.86 2435.83 18 % of Sales 211.444 253.733 304.479 365.375 438.45 10 % of Sales 117.469 140.963 169.155 202.986 243.583 93.975 112.77 135.324 162.389 194.867 2 % of Sales 23.4938 28.1925 33.831 40.5972 48.7166 70.4812 84.5775 101.493 121.7918 146.1504 30% 21.1444 25.3733 30.4479 36.5375 43.8451 49.3368 59.2043 71.0451 85.2543 102.305

Assumptions for FCF Changes in Net Working Capital Past requirement of NWC Year Net Working Capital Sales NWC Turnover Ratio March 2010 March 2009 March 2008 March 2007 March 2006 368.19 259.46 92.58 79.14 18.05 939.75 2.55 762.4 2.94 406.46 4.39 214.24 2.70 112.66 6.24

Average NWC Turnover Ratio = 3 times Year Incremental Sales (Projections) NWC Required (3 times) March 2012 234.94 78.31 March 2013 234.94 78.31 March 2014 281.92 93.97 March 2015 338.31 112.77 March 2016 405.97 135.32

Changes in Capital Expenditure Past requirement of Capital Expenditure (based on Gross Block) Year Capital Expenditure Sales Capital Expenditure Turnover Ratio March 2010 March 2009 March 2008 March 2007 March 2006 162.82 136.86 121.25 67.33 38.54 939.75 5.77 762.4 5.57 406.46 3.35 214.24 3.18 112.66 2.92

Average Capital Expenditure turnover ratio = 4 times Year Incremental Sales (Projections) Capital Expenditure Required (4 times) March 2012 234.94 58.735 March 2013 234.94 58.735 March 2014 281.92 70.48 March 2015 338.31 84.5775 March 2016 405.97 101.4925

Free Cash Flows

PAT Interest (1-t) Unlevered Income Depreciation NOPAT Changes in NWC Changes in Capex FCF Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 49.34 59.20 71.05 85.25 102.31 16.45 19.73 23.68 28.42 34.10 32.89 39.47 47.36 56.84 68.20 117.47 150.36 78.31 58.735 13.32 140.96 180.43 78.31 58.735 43.39 169.15 216.52 93.97 70.48 52.07 202.99 259.82 112.77 84.58 62.47 243.58 311.79 135.32 101.49 74.97

Equity Beta, Unlevered Beta & Unlevered Cost of Capital (Ku)

Equity Beta for J Kumar Infra Projects is 1.44 (Source: www.nseindia.com) Unlevered Beta Formula for Calculation of Unlevered Beta

Here, Bu is the Unlevered Beta =? BL is the Levered Beta= 1.44 TC is the Average Corporate Tax Rate = 30% D/E is the Debt to Equity Ratio = 0.44

Unlevered Beta (Bu) = 1.1

Calculation for Unlevered Cost of Capital

Step 1: Find Ke Ke = Rf + (Rm-Rf) Here, Ke =Cost of Equity =? Rf =Risk Free Rate = 8.24 % ( 91 days T-Bill Rate) ( Source : www.pnbgilts.com) = Levered Beta = 1.44 Rm = Market Return = 18% ( Average of Sensex Returns for past 15 years) Ke = 22 %

Step 2 : Find Ku Ku = Rf + u (Rm-Rf) Here Ku is the Unlevered Cost of Capital =? Rf = 8.24% u = Unlevered Beta = 1.1 Rm = 18% Ku = 19%

Adjusted Present Value (APV)

March 2012 13.32 135.30 March 2013 43.39 March 2014 52.07 March 2015 62.47 March 2016 74.97

FCF Ku @ 19% Present Value of FCF @ Ku Interest Tax Shield ( Interest * Tax Rate) Cost of Debt ( Average of the Past Financials) @ 12% Present Value of Tax Shield @ 15% Enterprise Value on APV Method PV of FCF + PV of Tax Shield

7.05

8.46

10.15

12.18

14.61

36.29 171.59

Enterprise Value on Market Capitalization

484.99

5. Conclusion
Enterprise Value of J Kumar Infra Projects Ltd on the basis of Adjusted Present Value (APV) is Rs. 171.59 crores and whereas on the basis of Market Capitalization is Rs.484.99 crores. So there is a huge difference in the valuation of the target company under both the methods. Issue of shares to the Target Company If the shares are issued to the Target Company on the basis of the Market Value of its Equity then that decision will not consider the practical implications of the future performance of the company. Hence the Adjusted Present Value Method gives a balanced approach to value a target company and it can be used to negotiate before deciding on the issuance of the shares to the target company.

6. Bibliography

Enrique R.Arzac (2005) Valuation for Mergers, Buyouts and Restructuring , Student Ed. Wiley http://in.reuters.com/finance/stocks/overview?symbol=JKIP.NS http://www.pnbgilts.com/index.php http://en.wikipedia.org/wiki/Adjusted_present_value http://www.jkumar.com/JKIL%20PPD%20Full.pdf http://www.investopedia.com/terms/a/apv.asp#axzz23yqDXQEl http://www.moneycontrol.com/financials/jkumarinfraprojects/profit-loss/KI01#KI01

Annexure I
Income Statement Particulars Sales Turnover Excise Duty Net Sales Other Income Stock Adjustments Raw Materials Power & Fuel Cost Employee Cost Other Manufacturing Expenses Selling and Admin Expenses Miscellaneous Expenses Total Expenses Operating Profit PBDIT Interest PBDT Depreciation Profit Before Tax Tax Net Profit Mar '11 Mar '10 Mar '09 Mar '08 Mar '07 939.75 762.4 406.46 214.24 112.66 0 939.75 16.51 43.5 0 0 23.78 779.31 15.4 29.88 848.37 134.88 151.39 27.71 123.68 15.85 106.96 33.05 73.92 0 762.4 7.08 63.11 0 0 16.83 662.97 14.18 4.25 698.23 127.28 134.36 14.81 119.55 14.47 105.08 35.13 69.97 0 406.46 6.94 0 0 0 9.55 313.95 15 6.19 344.69 61.77 68.71 7.98 60.73 10.67 48.89 15.97 32.93 0 214.24 2.78 1.15 122.99 0.17 25.43 11.37 11.41 3.39 174.76 40.63 43.41 7.73 35.68 6.09 29.59 10.09 19.5 0 112.66 0.7 0.2 66.77 0.06 11.09 8.06 7.7 1.65 95.33 17.53 18.23 3.04 15.19 3 12.16 4.15 8.01

Annexure II
Balance Sheet Particulars Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities Application Of Funds Gross Block Less: Accum. Depreciation Net Block Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets

Mar '11 Mar '10 Mar '09 Mar '08 Mar '07

27.8 27.8 0 0 350.4 0 378.2 167.4 0 167.4 545.6

27.8 27.8 0 0 283.78 0 311.58 54.63 1.89 56.52 368.1

20.72 20.72 0 0 130.05 0 150.77 48.51 0 48.51 199.28

20.72 20.72 0 0 101.97 0 122.69 38.26 0 38.26 160.95

12.5 12.5 0 0 9.01 0 21.51 31.62 0.1 31.72 53.23

162.82 48.74 114.08 0.1 156.23 101.84 7.57 265.64 272.78 39.26 577.68 89.94 119.55 209.49 368.19 3.49 545.62

136.86 33.92 102.94 0.95 113.25 67.28 50.04 230.57 209.32 28.59 468.48 122.47 86.55 209.02 259.46 4.76 368.11

121.25 20.18 101.07 0.95 36.23 29.67 6.28 72.18 90.17 17.97 180.32 54.65 33.09 87.74 92.58 4.69 199.29

67.33 9.55 57.78 18.41 6.16 14.97 7.45 28.58 49.62 36.8 115 18.59 17.27 35.86 79.14 5.63 160.96

38.54 3.48 35.06 0 3.29 1.28 0.89 5.46 17.97 10.14 33.57 11.53 3.99 15.52 18.05 0.14 53.25