Valuation Report

Strictly Private and Confidential
Certificate Course on Valuation A Case Study

Prepared By The ASC Group
Case Study on Business Valuation

As a part of the curriculum of Certificate Course on Valuation this is a case
study on Business Valuation of Pashmina Industry Limited, a Hi Fashion
niche ladies apparel Unit.
The scope assigned by the learned Chairman of the course is generic i.e. to
do a case study on Value of any Business, the detailed steps and calculations
have not been elucidated in the report. The Enterprise Value has not been
extended to the transaction value and a brief reference is made in a client
advisory to factor in certain critical parameters and points for a final
determination of the Valuation.
An attempt has been made as students to use all that has thus far been
imbibed, blending the same with the experience on hand in the context.

Contents
Client Introduction Context and Purpose
Preliminary Discussions spelling Client Salient attributes and

building a Information Memorandum.
Scope of Engagement
Valuation Methodology and Approach
Industry Overview
Standard of Value and Valuation Date
Premise of Value
Presentation on country overview, client profile, strengths

& opportunities, synergies in new joint venture
Financial workings Methodologies and Approach to
Valuation
Historical & Projected Financial Data
Comments on Financial Workings

factors to be considered later
Other Methods
Conclusion on valuation
We Relied on
Caveats and Disclaimers

&
Assumptions
and
Client Introduction Context and Purpose
Pashmina Industry Ltd. the largest manufacturer & exporter of Hi-Fashion

ladies Apparel in Nepal has been approached by its largest customer
(purchasing over 29% of the total turnover of the Company) to acquire a 70%
to 80% stake in the Company. The proposed Joint Venture through this
inorganic structuring is supposed to be a win-win for both the proposed
buyer (a leading UK based entity of global repute dealing in multiple high
fashion brands) and for Pashmina Industry Ltd., Nepal.
Pashmina Industry Ltd. approached The ASC group to assist them in
structuring the Joint Venture and provide Professional Services interlia
comprising of Valuation of the Business for the proposed sale of 70 80%
stake in the existing company to the proposed identified buyer.

Preliminary Discussion
In the back drop of the above, the preliminary discussions on ____ 08 and
_____ 08 held at New Delhi between the promoters of Pashmina Industry Ltd.
and The ASC Group are synopsized below:
Clients Brief:
To value the enterprise of Pashmina Industry Ltd. Nepal ( a closely held
company of the Mal family the entire share holding is held at present by
members of the family only) for purpose of selling 70%-80% stake of the
promoters to a proposed identified buyer who is at present the largest
customer of the Company. The Promoter owner is a Designer of International
repute having designed and manufactured products for large fashion houses
of Europe and USA and sold at the best Fashion Shows and Exhibitions in the
world.
Investor (Buyer):
A leading (one of the largest) Ready Made Garments wholesale marketing
establishment of Hi Fashions niche ladies wear in Europe (also a 29% Buyer
of the present turnover of Pashmina Industry Ltd. Nepal) also supplies to
USA.
Profile of Pashmina Industry:
A well-established exporter (exports around 93% of its total turnover) of Hi
Fashions Knitwear and Pashmina ladies wears with major customers in
Europe and USA. The proposed investor is an existing customer of around
29% of the present sales turnover of the company. Three more customers
account for another 40% of turnover and the balance turnover is sold to
about 60 other clients of the company across continents primarily the
European Union.

Pashmina Industry Ltd is a structured integrated manufacturing unit

operating with a state of art manufacturing facilities in the heart of
Kathmandu. At helm (the largest shareholder and Director of the company)
of the affairs is the founder promoter - a lady who is a designer of repute
having designed for leading fashions shows all over the globe. The product is
a premium
range of very Hi Fashion (niche) Ladies formal wear with the
critical raw material being Pashmina and Georgette both being available in
Nepal and from proximate countries (namely , India, China, Hongkong and
Taiwan).
The seller has no constraint in expanding production and ramping up scales.
Being highly labor intensive expansion does not entail substantial capital
investment.
Customer for hand made designs rely heavily on subcontinent units for
outsourcing.
The company has an advantage of having labor trained over years (it has
been in business for over 9 years) with skills sets that are required for the
products. The existing labor generate replacements / supplements of labor
and a combination of natural talent/ family orientation and hands-on training
by peers ensure that adequate labor with requisite skills is available for peak
production requirements.
The unit is endowed with in house facilities for all processes that are required
by the manufacturer.
Orders are commensurate with capacities. Being specific, most orders
(except for old large customers) are accompanied with earnest advance.
Lead time for production is around the 30-45 days and payments are against
Irrecoverable L/Cs and for some old customers on a usance D/A basis which
credit is around 75 days. The company has no history of Bad Debts

No comparative date is available in public domain

Advantage to Buyer:
1. Increased off take and an assured one with controlling interest.
2. Backward Integration.
3. Good Profits (NPBT of around 25%).
4. Other existing clients on book.
5. No Gestation.
6. Control for design / delivery.
7. Scalable in capacity.
8. Good rapport with the existing promoter seller who is the key cog in
the wheel with excellent competence skills of design & capabilities with
a proven track record of running a production unit successfully.
Advantage to Pashmina Udyog:
1. Assured Off Take.
2. Feedback on latest Design Trends globally.
3. Likely modernization of Plant with better production techniques.
4. Reduced seasonality, for Buyer commits to ensure that Plant 0fftakes
are increased and are regular through the year.
5. A part of a vey large group in Europe. Seller catapults to fame in sub
continent and EU leading to greater client confidence and alluring
fringe quality conscious clients.
Likely fall outs:
1. Some existing customers (about 6% of present customers) likely to
walk out perceived as competitors to proposed buyer. Loss likely to
be set off by increased off take of Buyer Group.
2. Pressure on Margin with Buyer Group seeking preferred prices. Though
committing to treat this JV as a commercially exclusive venture yet
likely pressure on prices likely to percolate.

Scope of Engagement
STRICTLY CONFIDENTIAL
Date: June 14, 2008
To,
Pashmina Udyog,
Kathmandu, Nepal.
For the attention of Mr. _____________________
Dear Sir,
This letter sets out the basis upon which The ASC Group (ASC or we or
us), will work with Pashmina Udyog Ltd. (the Client or you or the
Company) in relation to the proposed transfer of rights / sale / acquisition of
shares of the Client / Clients Company by another party / strategic investor
in the Company.
1.
Project
We understand that your Company is among the leading manufacturer

exporter of knit wear and other apparels for ladies in Nepal. The Promoters
(majority shareholders - in this case in excess of 70% of the present
shareholding) are desirous of divesting its Shares in the Company to an
identified buyer. Accordingly, the Company has sought the assistance of ASC
to act as its exclusive financial advisor in arriving at a fair valuation for the
transfer of the enterprise (company) / shareholding to the proposed
identified buyer (the assignment). ASC would be pleased to assist you in
this respect.
We believe that we are uniquely positioned to provide you with the requisite
assistance for the assignment. We summarize in this Engagement Letter the
scope of work that we would provide to you in this connection and the
related terms of our engagement.
2.
Services
Our role will be to act as an Advisor to you on the Project which interalia shall
entail Valuation for the transfer of the shareholding to the proposed
identified buyer. In this role we may, as required and as appropriate, perform
all or some of the following work:
Obtain a good understanding from you of the past and present

operations, financial condition, expansion plans and prospects of the
Business.
Prepare the Presentation detailing the key aspects of the business,

based on information provided by you.
Prepare a brief Proposal with different options of the pricing (share

valuation) for the Management using methodologies like DCF / Price
earnings Multiples etc.
Preparation of a detailed pricing analysis, based on the discussions

with the management of the aforesaid factoring in their feedback and
additional points, if any.
Make presentations to proposed identified buyers (s).
Evaluations of counter offers from proposed identified buyers in terms

of:
o
Valuation and a band of Pricing;
Structuring of the deal; and
Terms and conditions related issues:
Assist in the Due Diligence exercise
Assist in the negotiations on the final agreement
Assist in finalizing the commercial issues and making sure that

these issues are covered in the Transaction Documents
Assist in the legal issues associated with the transaction. For this
we would work in co-ordination with the lawyers appointed to you.

Some of the tasks involved would be like reviewing and finalizing the
Transaction Document, etc.
o
Finalizing the structure.

Assist in closing the transaction.
Our duties and responsibilities shall be limited to those expressly set out in
this letter and without limiting the generality of the foregoing, we shall not:
Provide advice on any aspects relating to legal and regulatory

requirements in or outside Nepal;
Be responsible for any facts, estimates, opinions, projections, forecasts

or other information (howsoever presented) included in any financial
model or business plan, which shall be your responsibility or the
responsibility of others, as appropriate;
Express any independent opinion on, or take responsibility for, the

achievability of any forecasts or the reasonableness of any assumptions
or upon the fairness or accuracy of any financial or other information
relating to the business or any of the products under development;
Express any independent opinion on the value of the Business or to

identify any buyer for the same or to arrange for any acquisition or
merger transaction other than to facilitate one with the proposed buyer
identified by you
Owe any duty of care to any person other than you.
3.
Project Management
3.1
Deliverables and time-frame
ASC will depute Mr . in person and mobilize their engagement team to

commerce work on the date of execution of this Engagement Letter (the
Start Date). Throughout the course of the assignment, we shall be in close
discussion with you and keep you informed of the progress of our work.
Documentation that may be required from time-to-time, will be prepared and

delivered according to schedules agreed upon at the time such document
preparation work is undertaken.
At this point in time, it is difficult to precisely estimate the time required for
achieving the Transaction Closing Date i.e. date of execution of Transaction
Documents. This could vary depending on the complexity of the transaction
and the keenness of the counter parties. Accordingly, you acknowledge that
achieving Transaction Closing Date is a function of numerous factors, many
of which are out of your or ASCs control.
Our timing will also depend significantly upon the availability and the
promptness with which reliable and accurate information is made available
to us as also to your feedback. Subject to the availability of information as
aforesaid a Draft Valuation Report shall be submitted within 45 days of the
Start Date. The Draft Valuation Report opine on the Fair Value of the
enterprise as at July 15,2008 i.e. the date of your last financial year end.
3.2
Engagement team
This engagement would be led by . If required he will be supported

by a team of experienced finance persons and consultants.
3.3
Fees
We believe that the essence of building a relationship is the quality of the

service and expertise that we provide.
Our fees will be structured as a
Retainer fee
Fee on submission of Valuation Report
Fee on Completion of Assignment
3.3.1 Retainer Fees

Retainer fee is designed to compensate ASC for a portion of the time and
efforts expended from the Start Date to Transaction Closing Date. The
amount of retainer
fee will
be limited to
Rs. /-
(Rupees
Only) which will be payable to us as per the payment

schedule detailed later.

3.3.2 Fee on Submission of Valuation Report

The submission of Valuation Report shall be after a detailed feedback is
obtained on a Draft Report and shall incorporate your legitimate comments
without vitiating our autonomy to arrive at a reasonably correct Fair Value of
the Company. The fee payable at this stage will be Rs. /- (Rupees
Only)
3.3.3 Fee on Completion of Assignment

On making the final presentation to the buyers and on finalizing the
proposed structure in mutual discussion with the proposed buyers we shall
be entitled to the final fees of Rs. /- (Rupees
Only)
Whilst the structure and nature of the project may change as discussion with
identified buyers progress, you acknowledge that this is the basis on which
the project has been undertaken. For the avoidance of doubt, the above fee
structure will not be prejudiced in the event that the final transaction, once
completed, has evolved away from that originally envisaged in this letter and
we will still be entitled to our fee after completion of the work as envisaged
above and on our advise pursuant to this engagement or any variation of this
engagement.
3.3.4 Termination Fee
If after ASC having
i)
Prepared a brief Proposal with different options of the pricing (share

valuation) for the Management.
ii)
Prepared of a detailed valuation analysis, based on the discussions

with the management of the aforesaid factoring in their feedback
and additional points ,

you decide before the Transaction has been completed, to withdraw from
the Project, you will pay us a termination fee of Rs. ./- (Rupees
only) (which will be in addition to the retainer fees and
reimbursement of expenses).
3.3.5 Out-of-pocket expenses
In addition to fees, you shall arrange a separately reimburse ASC for
reasonable and actual out-of-pocket expenses incurred from the Start Date
till the completion of the services provided hereunder. Generally, out-ofpocket expenses represent travel, document procurement, duplication and
document delivery and related outflows. Out-of-pocket and international
travel expenses, if any, will be incurred by us only after consultation with you
and for the period mutually agreed.
In addition, fees payable to external consultants (lawyers, etc), if any, will be
paid directly by you. The appointment of such external consultants will be
with your prior approval.
3.3.6 Service Tax
Service tax, as applicable (presently 12.36% of Gross Fees), will be billed in
addition to the above.
3.3.7 Payment schedule
50% of the retainer fee will be payable immediately upon signing of this
letter.
50% of the retainer fee will be payable on our submitting our presentation on
the methodology of working within one week of above.
Fee on Submission of Valuation Report and Fee on Completion of Assignment
shall be payable and be paid within 10 days of our raising a Bill for the same.

4
4.1
Confidentiality:
As a party receiving information of critical importance from you we
acknowledge that the Confidential Information is confidential and
undertake:
(a)
to keep the Confidential Information in strict confidence;
(b) to use the Confidential Information solely for the study and for use in
this assignment;
(c) not, without the prior written consent of the you, to disclose the
Confidential Information furnished to it to anyone other than our
representatives, affiliates, agents or advisers who have a legitimate
need to know the Confidential Information in order to perform their
duties
relating
to
appraisal
towards
the
evaluation
of
the
of
its
assignment;
(d)before
disclosing
Confidential
Information
to
any
representatives, affiliates, agents or advisers to ensure that such

party is aware of the terms of this Scope of the Assignment as if a
party hereto, ensure compliance by such person and be liable for
any breach of such obligations by such person.
4.2 The undertakings in clause 4.1 will not apply to any Confidential
Information which:

(a) at the time of disclosure to us or thereafter has become part of

public
knowledge
or
literature
without
breach
of
the
said
undertakings by such Party; or

(b) we can show was in our possession at the time of disclosure, and
was not acquired by us under an obligation of confidence; or
(c) the we can show was received by us after the time of disclosure
hereunder from a third party who, to the best of our knowledge, was
not bound by a confidentiality agreement with you or otherwise
legally prohibited from transmitting the information to the us.
4.3
In the event that we or any of our affiliates, representatives or other

permitted are required or requested by any court, legislative,
professional, regulatory or administrative body to disclose any
Confidential Information, then we shall, where notification is legally
permitted, promptly and prior to disclosure notify you. We will take all
reasonable actions to limit the disclosure of Confidential Information.
5.
Conclusion
We thank you for the opportunity to present this Engagement Letter to you.
We believe that ASC has the right blend of international perspective, to
provide you with a level of quality professional service that will be fully
commensurate with your expectations.
We are keen to serve you and would be delighted to work on this venture. We
assure you that this engagement will receive our best attention.
We request you to sign and return a copy of this letter to us as your
confirmation of the scope of work and the terms described in this letter.
In case you require any clarification, please do not hesitate to contact us.
Yours sincerely
For ASC.
____________________________
..
________________________________
Date
We hereby confirm our agreement to the terms of the above letter and the
enclosed terms of professional engagement.
_______________________________________
For and on behalf of
Mrs. .. Mal

_______________________
Date
1.
1.1
Industry Overview
Background
1.1.1
The apparel industry is identified as a buyer-driven value
chain that contains three types of lead firms: retailers, sourcing agents
and apparel manufacturers. Innovation in the global apparel value
chain is primarily associated with the shift from assembly to fullpackage production. Full-package production gives more autonomy to
the supplying firm and creating more possibilities for innovation and
learning. With the globalization of apparel production, competition has
intensified as the leading apparel retailers across the world have
developed extensive global sourcing capabilities.
1.1.2
The Textile and apparel industry in the sub continent
generates revenue in excess of $55 billion. Most Indian textile

companies are expanding capacities across value chain in areas like
design, yarn, fabric, garments and retail forays.
1.1.3
The industry in the sub continent which was growing at 3-
4 percent during the last six decades has now accelerated to an annual
growth rate of 16 percent in value terms and is expected to reach to
the level of US $115 billion by 2012.
1.2
Global Apparel Industry

1.2.1
The Global Apparel Industry is undergoing a major
restructuring, especially in the developed economies. The industry has

seen a concentration of markets in the developed regions of the world,
namely the US, Canada, EU and Japan. This has resulted in the apparel
manufacturing industry in the sub continent thriving on export of
apparels to the larger players in these markets.
1.3
Key Trends
Some of the key trends of the Apparel Industry are as
1.3.1
under:a) Phase-out of MFA: Under the WTO-negotiated agreement on Textiles

and Clothing, the whole global textile and apparel trade is now
free of quota restrictions. International retailers are sourcing from
low cost countries like India, Nepal, Bangladesh and China in order
to survive the cut-throat pricing war being wages in the Global
retail segment.
b) Vertical
Integration:
Nepals
Pashmina
industry
is
vertically
integrated from raw material to finished product. It has the

complete supply chain - right from fibers to finished products.
Further, business and cultural linkages with neighboring countries
like India , Bangladesh, Sri Lanka, Thailand, Myanmar and China
provide a platform for sourcing from them as well.
c) Increasing
demand:
Many
international
retailers
have
begun
sourcing their apparel requirements, dispensing with the earlier

practice of operating through local buying agents.
d) Production Variety: Apparel production includes high fashion ladies
wear with hand made embellishment a variety sought after and
much in demand in EU and USA where such production is
characterized as niche and top of the end Flexibility in
production both in small lots and large lots is significant.
e) Comparative Advantages: Several comparative advantages include
abundant availability of raw material and labor.
f) Labor Force: Nepal and its proximate states provide for an
abundant,
low-cost
base
of
labor

which
has
long-term
sustainability and is skilled in garment manufacturing and

finishing.
g) Capacity: Textile and apparel industry has consistently remained
flexible in terms of production quantity and lead time. A large base
of European and American customers are already served from
Nepal, with almost 75% of apparel exports made to European
Union (EU) and the US.
h) Government initiatives: Government policies are conducive to
export and congenial for growth with further attempts being made
to reduce and remove infrastructure bottlenecks.
1.4
Key Inhibitors
1.4.1
Some of the key inhibitors of the Indian Apparel Export
Industry are as under:

a)
Political
Stability:
Despite
all
the
inherent
advantages and the various government reforms that have been

undertaken lately and despite a new democratic government, the
market for textile and apparel exporters has not been growing unto
its full potential because of the ramifications of political turmoil in
the recent past.
b)
Labor laws: Restrictive labor laws in India and the
state protection under new dispensation is likely to be a deterrent

and cost escalations on the count are expected. Overprotection and
bureaucracy make work force less manageable, less disciplined and
thus less competitive than it could be.
c)
Logistics: Due to its geographical location, Nepal is
further from major markets. This substantially impacts the logistics

costs. Also, being land locked and reliance on ports of neighboring
countries at times is likely to adversely affect the apparel sector's

competitiveness. One major corrective step is to facilitate the
speedy shipment of finished goods.
d)
Quality manpower: Lack of institutional training for
workmen and on latest state of art equipment & plants reduces

productivity and efficiency.
e)
Cost
constraints:
Other
factors
that
affect
competitiveness are relatively high interest cost, power tariffs,

structural
anomalies
and
productivity
levels
(affected
by
technological obsolescence). Capital costs as a percentage of total

production cost are higher as compared to the neighboring states.
f)
Fragmentation: Given the fragmented nature of the
industry, it is difficult to reap the benefits of economies of scale.

Firms are typically smaller thereby affecting the cost structure as
well as ability to attract customers with large orders. The general
tendency is to add capacity once the order has been won rather
than ahead of the demand.
g)
Marketing: To exploit global markets it is necessary
for the garment industry to have better presence in these markets.

Accordingly, appropriate marketing is an aspect that requires
immediate attention. This can be facilitated by collaboration with
marketers and fashion houses in the United States, European and
Japanese markets.
h)
Seasonal Nature: Garment manufacturing is highly
seasonal. As fashions tend to change frequently, it is not possible to

manufacture and keep stocks for any length of time. Therefore, the
garment industry tends to be highly seasonal.

Domestic Market: The market size being small in
i)
Nepal the domestic industry for Hi Fashion Wear within Nepal is

markedly low.
Retailer
j)
consolidation
threat
to
manufacturers: In the fashion segment most buying by retailers is

done in Organized Buyer fairs or Ramp shows and fashion Fiestas.
The collective presence of large number of sellers and buyers at the
same time at such events organized in developed world markets
makes marketing competitive. The objective of maximizing the
"consumer ownership" is paramount and growing. Competition in
the industry is strong if not fierce with big designers with backward
integration in production facilities wooing a niche target buyer
audience.
1.5
Way Forward
1.5.1
Most of the apparel produced for import into various
developed countries is now being made (or assembled) in developing

countries. Global sourcing and extensive use of subcontracting in the
apparel industry has thus had a favorable impact on the growing
apparel export industry.
1.5.2
Branded marketers have adopted several new strategies
which will alter the content and scope of their global sourcing
networks. One has thus to strive hard to move up the value chain by
making the most of the growing synergy between textiles and clothing
segments. This calls for a much higher degree of consolidation in the
apparel sector with larger units acquiring the smaller ones and major
buyers building synergies with assured, high quality suppliers.
1.5.3
Industry analysts expect that world trade in will surge
exponentially now that the quota era is over, and labor cost advantage
will result in a disproportionate market share gain for sub continent

exports. Most of the major buyers have increased their sourcing from
and are bullish on the prospect of the industry. Success will depend on
modernization of the production process, scale economies and
improving supply chain management.

Standard of Value and Valuation Date:
Pertinent to freeze is the identification of the type of value being utilized in

this engagement.
Of the generally used Fair Market Value (FMV), Investment Value (IV)
and Fair Value (FV) in like circumstances, we opine that since market level
synergies are preponderant and would also encompass the investor specific
synergies, the standard of value most apt in the context is Fair Value.
Fair Value for this orderly transaction is the amount as at July 15,2008
for which the stake is to be transferred between knowledgeable buyer and a
willing seller (Pashmina
Industry
Promoters)
in an arms length
transaction.
Synergy of / to investor subsumes into Fair Value in the instance. Both the
Buyer and Seller are in possession of pertinent facts and neither is under a
compulsion to act and hence FAIR VALUE is the standard of value in the
analysis.

Premise of Value
The sole safe assumption that one can volubly make in the transaction is
that both parties wish to fortify their relationship and continue that bonding
for perpetuity. The premise of the value determination is GOING CONCERN
and the business value so determined is of an enterprise expected to
continue to operate in future.

While valuation is not an exact science nor can determinations of a

valuation exercise be dot values or prices , an attempt has been made
to arrive at a determination of Fair
Value using well accepted valuation
techniques ensuring that the users of this report can rely on the same for a
relatively objective judgment.
Following have been factored in the approach:
a)
The Country and Macro investment overview (Please refer our

Presentation Enclosed)
b)
The Industry Scenario (As Above)
c)
The Company overview and its strengths and opportunities

(Please refer our Presentation Enclosed)
d)
The Strategic Intent of the proposed Joint Venture partner and of

the proposed buy out
(Please refer our Presentation
Enclosed)
e)
The
Fall
Outs
and
weakness.
(Please
refer
Preliminary
Discussions above.)
f)
The Past Track record of business and growth rate (Please refer
Historical Data & Projected Financial Data & Presentation Enclosed)
Pertinent to mention at this stage is that this exercise has been limited
by:
a)
Lack of and no access to comparable information. Not only are

comparables on an apple to apple situations not available, like or
similar data and industry comparison has been hard to find. The sellers
and buyers have despite an abundant experience and knowledge of

the business domain been unable to help build or simulate a

comparable model structure for an objective analysis based on
comparables.

Exclusion of some Generally Considered Methods of
Valuation
1.
The Business being labor intensive and inversely in the

instance very less capital intensive the Net Asset Value (NAV)
method has been given a go-by for any analysis.
2.
As mentioned above scant, sparse and virtually conspicuous

by absence - the lack of information on comparable company data or
any comparable transaction data renders a market approach to
Fair Value a redundant choice.
Method Selected
The method selected for valuation is DCF Discounted Cash Flow method
also coined as Income Approach to Valuation.
Discounted Cash Flows DCF
DCF uses the future free cash flows of the company discounted by the firms
weighted average cost of capital (the average cost of all the capital used in
the business, including debt and equity), plus a risk factor measured by beta,
to arrive at the present value.
The DCF method is a strong valuation tool, as it concentrates on cash
generation potential of a business. This valuation method is based on the
capability of a company to generate cash flows in the future. The free cash
flows are projected for a certain number of years and then discounted at a
discount rate that reflects a companys cost of capital and the risk associated
with the cash flows it generates. DCF analysis is based mainly on the
following elements:
Projection of financial statements (key value driving factors)
The cost of capital to discount the projected cash flows


Analyze
Company
Projections
Determine
Equity &
Debt Risks
Project
Revenue &
Expense
Buildup
Determine
Country
Risk
Determine
Terminal
Value
Multiples &
Growth
Rate
Determine
Capital
Structure
Project
Free Cash
Flows
Derive NPV
of Free
Cash Flows
Develop
Weighted
Average
Cost of
Capital
Analysis
Keeping in mind the context and purpose of the Report, we have

used the DCF method as it captures the growth potential of the
business going forward. We have used this method to calculate the
fair value of equity of the Company based on the financial
projections prepared by the Management of the Company.
Since DCF valuation, done right, is based upon an assets fundamentals, it is
less exposed to market moods and perceptions. DCF valuation takes into
account the underlying characteristics of the firm, and understands the
business of firm. It clearly identifies the assumptions made by buyer while
paying a given price for any asset. It works best for investors who either
have a long time horizon or are potential acquirer of the whole firm. In long
term period there is correction in market for price to revert to true value.

Financial Working -
Valuation Methodology and
Approach contd..
a)
Cash Flows :
The Actual Data (Audited) for last three years, the estimate for the current
year and the projections for next 5 years (which estimates and projections
are based on the present order book, market trends, capability of
scalability but do not factor an increased off take of intended buyer)
enable us to calculate the Cash Accruals on the cardinals of conservative
accounting principles.
The detailed workings are enclosed in Annexure I (In an XL Spread Sheet)
Cash Flows based on empirical and projection data have been adjusted for
possible Bad Debts (Attrition) - even though the company has no history
of the same - and for Stock Obsolescence. This is based on our discussion
with the Management during our visit when old inventory was sought to
be remade / dumped for sale. The Company has no contingent liability &
with an impeccable
track record for payment of taxes which prima facie
have been duly provided / paid to date, no adjustments are sought to be

made on this count.
Note: Our comment on Financial Data and Tax Compliance track of the
company at this stage are based on a cursory perusal and are subject to
validation at the time of detailed Financial and Legal due diligence at a
later date by an independent professional entity.

b) The Terminal Value i.e. the present value of a going concern beyond the
period of projection to infinity has been conservatively taken factoring an
expected growth rate of the industry at 5%.
c) The Discount Factor (also termed as the Discount Rate) is the most
challenging task in the mathematical calculation of Valuation. For
calculating the Net Present Value of cash flows the Discount Rate has
been taken as the cost of equity which has been calculated by the Capital
Asset Price Modal (CAPM) which is
Cost of Equity = Risk Free Return Rate + (Market Return Risk Free Return) less
(Adjustments Per Below)**
= [8% (Long Term Govt. Bond Rates)] + [0.75 (13% * - 8%)] less
(Adjustments Per Below)**
* Market Return is the Average Return from Mutual Funds (thereby

obviating extreme volatile stock situations)
**The Cost of Equity Calculated above has been reduced by 25% for
lack of liquidity & volatile market factors.

Comments on Financial Workings & Assumptions and factors

to be considered later
Adding the present value of Cash Flows and the net present value of the
Terminal Values of
Cash Flow the enterprise is valued at USD 1,92,87,970/- as at July 15, 2008.
The said Enterprise value has not been adjusted for the present Debt
outstanding because the promoter has expressed
that the same shall be
short closed by August 1,2008 by fresh capital induction by the promoter and
both the intended buyer or the promoter do not wish to work with any debt
leverage or financing options.
The Enterprises Value is sought to be adjusted for the final value of the
transaction for:
a) The Control Premium
b) Lack of Marketability of Promoter post Sale of stake since only a tag
along right would be available. The other option of selling a
minority stake to another group would nevertheless attract a
discount.
c) Intangible of the reputation of the promoter designer to seek and
expand Business and the huge advantage of continuing to act as
CEO of a well established team of Production & industrial house
with a back of the hand knowledge of the local industrial set
up.
d) Country Risk more particularly political stability & changing
economic policies
e) Reduced marketing costs and increased off takes (better economics
of scale) inherent advantages of the proposed buyer.

Increase Enterprise
Value
from
Pashmina
Industry
perspective
and
Reduce Enterprise value from Pashmina Industry perspective.

We shall assist you in making the requisite adjustment after an interface and
discussion with the proposed buyers. The methods of control premium &
discount on lack of marketability post the stake sale shall be spelled and
comprehensively addressed separately thereafter. Our engagement shall also
entail a detailed working of significant ratios at that stage.

Other Methods
The other income approach method i.e. P/E Multiples was not dynamically
weighed in wake of lack of comparables though a cursory check on
benchmarks on certain websites put the P/E multiple at around 8-10 for
similar (so to say) business. The DCF calculations leads to a determination
that is close to valuation based on such benchmark P/E multiples. Though
satisfying it is noteworthy to mention that such comparisons intra-the
methods may at times be obfuscatory.

Conclusion on Valuation
Save and subject to our assumptions, caveats and disclaimers at places

elsewhere in this report we opine that the Fair Value of the Business as
at July 15,2008 is USD 1,92,87,970/-, say USD 19 million.

We relied on:
1.
Management Brief
2.
Factory Visit
3.
Historical Data & Study of Company Systems
4.
Industry Reports on Apparel Industry in Sub Continent of

Asia.
5.
Audited Reports & Financial Statements of Client and

meeting with Auditors
6.
Financial Projections of the company as validated with

order book & long term customer commitments contracts.
7.
Websites of Nepal Govt. & General Information
8.
Customers list
9.
Vendor list & information from client of availability of Raw

Material
10.
Valuation Books & Publications and Certificate Course on

Valuation Study Material

Caveats and Disclaimers
Caveats
Provision of valuation recommendations and considerations of the issues
described herein are areas of our regular corporate advisory practice. The
services do not represent according, assurance, financial due diligence
review, consulting, transfer pricing or domestic / international tax-related
services that may otherwise be provided by us.
Our review of the affairs of the Company and their books and account does
not constitute an audit in accordance with Auditing Standards. We have
relied on explanations and information provided by the Management of the
Company and accepted the information provided to us as accurate and
complete in all respects. Although, we have reviewed such data for
consistency and reasonableness, we have not independently investigated or
otherwise verified the data provided. Nothing has come to our attention to
indicate that the information provided had material misstatements or would
not afford reasonable grounds upon which to base the Report.
The report is based on the financial projections provided to us by the
management of the company and thus the responsibility for forecasts and
the assumptions on which they are based is solely that of the Management
of the Company and we do not provide any confirmation or assurance on the
achievability of these projections. It must be emphasized that profit forecasts
necessarily depend upon subjective judgment. Similarly we have relied on
data from external sources. These sources are considered to be reliable and
therefore, we assume no liability for the accuracy of the data. We have
assumed that the business continues normally without any disruptions due
to statutory or other external / internal occurrences.
The valuation worksheets prepared for the exercise are proprietary to The
ASC Group and cannot be shared. Any clarifications on workings will be
provided on request, prior to finalizing the Report, as per the terms of our
engagement.
The scope of our work has been limited both in terms of the areas of the
business and operations which we have reviewed and the extent to which we
have reviewed them.
The Valuation Analysis contained herein represents the value only on the
date that is specifically stated in this Report. This report is issued on the
understanding that the Management of the Company has drawn our
attention to all matters of which they are aware, which may have an impact
on our Report up to the date of signature. We have no responsibility to
update this Report for events and circumstances occurring after the date of
this Report.
We have no present or planned future interest in the Company and the fee
for this Report is not contingent upon the values reported herein.
Our Valuation Analysis should not be construed as investment advice;
specifically, we do not express any opinion on the suitability or otherwise of
entering into any transaction with the Company.
Disclaimers
No representation or warranty, express or implied, is given by ASC or

any of their respective partners, officers, affiliates, employees, advisors or
agents (and any warranty expressed or implied by statue in hereby
excluded) as to the accuracy or completeness of the contents of this
Report or any other documents or information supplied, or which may be
supplied at any time or any opinions or projections expressed herein or
therein, nor is any such party under any obligation to update the Report
or correct any inaccuracies or omissions in it which may exist or become

apparent. In particular, for reasons of commercial sensitivity, information

on certain matters has not been included in the Report. Such information
may be made available at later stage.
The projected financial contained the Report is based on judgments

estimates and assumptions made by the management of the company,
about circumstances and events that have not yet taken place.
Accordingly, there can be no assurance that the projected results will be
attained. In particular, but without prejudice to the generality of the
foregoing, no representation or warranty whatsoever is given in relation to
the reasonableness or achievability of the projections in the Report or in
relation to the bases and assumptions underlying such projections and
you must satisfy yourself in relation to the reasonableness, achievability
and accuracy thereof.
No responsibility or liability is accepted for any loss or damage

howsoever arising that you may suffer as a result of this Report and any
and all responsibility and liability is expressly disclaimed by us or any of
them or any of their respective partners, officers, affiliates, advisers or
agents.
ASC is acting as a financial adviser to the company only and to no

other persons in connections with the proposed investment in the
company. Neither receipt of the Report nor any information supplied in
connection with the proposed investment in the company by any person
is or is to be taken as constituting the giving of investment advice or to
constitute any person as a client of ASC in connection with the proposed
sale. This Report should not be considered as a recommendation by ASC
or affiliates or their respective partners, officers, affiliates, employees,
agents or advisors to invest in the capital of the company.
Neither the issue of this Report nor any part of its contents is to be
taken as any form of commitment on the part of ASC or affiliates to
proceed with the investment envisaged by the issue of this Report and
ASC reserves the right to amend the proposed investment procedure, to

terminate
the
procedure
and
to
terminate
any
discussions
and
negotiations with any person at any time and without giving any reason.
Should this Report (through the act or default of the recipient) reach
other persons our written consents, the recipient will indemnify ASC
against any loss or damage or other liabilities (including all costs) which
ASC may suffer as a result. In providing this Report, we undertake no
obligation to invite the recipient to proceed with a further investigation of
the company to provide the recipient with any additional information.
The Presentation enclosed and Annexure I enclosed herewith are an integral

part of this Report.
The ASC Group shall be pleased to take your call to discuss on all aspects of
this report.
For and on behalf of The ASC Group
Sd/(Authorised Signatory)
Dated : ../ ../ 08


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Client Introduction Context and Purpose

Preliminary Discussions spelling Client Salient attributes and

Valuation Methodology and Approach

Standard of Value and Valuation Date

Presentation on country overview, client profile, strengths

Historical & Projected Financial Data

Comments on Financial Workings

Caveats and Disclaimers

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Client Introduction Context and Purpose

Pashmina Industry Ltd. the largest manufacturer & exporter of Hi-Fashion

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Pashmina Industry Ltd is a structured integrated manufacturing unit

range of very Hi Fashion (niche) Ladies formal wear with the

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No comparative date is available in public domain

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We understand that your Company is among the leading manufacturer

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Obtain a good understanding from you of the past and present

Prepare the Presentation detailing the key aspects of the business,

Prepare a brief Proposal with different options of the pricing (share

Preparation of a detailed pricing analysis, based on the discussions

Make presentations to proposed identified buyers (s).

Evaluations of counter offers from proposed identified buyers in terms

Valuation and a band of Pricing;

Structuring of the deal; and

Terms and conditions related issues:

Assist in the Due Diligence exercise

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Assist in finalizing the commercial issues and making sure that

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Provide advice on any aspects relating to legal and regulatory

Be responsible for any facts, estimates, opinions, projections, forecasts

Express any independent opinion on, or take responsibility for, the

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Owe any duty of care to any person other than you.

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