PRIVATE EQUITY: INDIAS GROWTH CATALYST

Organized jointly by: Committee on Financial Markets & Investor Protection of ICAI & NIRC - ICAI

HARYANA, APRIL 06, 2008

PRIVATE EQUITY: VALUATION OF DEALS

Presentation By: CA, Navjeet Singh Sobti Executive Vice-Chairman Almondz Global Securities Limited

VALUATION CONCEPTS

TOPICS COVERED

APPROACHES TO COMPANY & BUSINESS VALUATION

SAMPLE CASE STUDIES

VALUATION CONCEPTS

 Valuations provide useful baseline to establish a

value for a business as on today or a forecasted period

ABOUT VALUATIONS

It serves as an alternate - to the role that major

stock exchanges play for public companies - for small/unlisted companies

Assists in arriving at exit strategies for the

Existing Owner & Prospective Financial/Strategic Investor to obtain value for their stake in the companies when they desire to sell

Valuation of Large PublicListed Companie s

Actual Stock Price on Exchanges function of supply-demand and investor preferences Analysts Estimates They typically fall within a reasonable band

THE ESSENCE

OF
VALUATION

In India, most investment opportunities are in companies that lie between these two extremes

Companies are often privately-held Project rapid growth Future performance subject to high degree of variability

Early Stage Investin g

Simpler Valuation Process Derived from Capital the Company needs & % stake expected by VCs

VALUATION UNCOVERS WORTH OF MANAGEMENT

YES

Is Derived Valuation > Expected Value ?

NO

THE UNDERLYING
Might be an Opportune time to sell Opportunity for Business Owner to work towards increasing Value of the Company

PRINCIPLE

Unless the seller has established a UNIQUE & SCALEABLE BUSINESS MODEL, it's not likely that an informed purchaser will pay a substantial premium; however, for the seller who has positioned the business properly, the rewards can be substantial.

APPROACHES TO COMPANY & BUSINESS VALUATION

INCOME BASED APPROACH Discounted Cash Flows Dividend Discount Model

APPROACHES TO

VALUATION

ASSET BASED APPROACH Net Asset Valuation MARKET APPROACH Relative Valuation using Multiples

INPUTS Free Cash Flows Forecasted Period Cost of Capital Cost of Equity &/or Cost of Debt

Free Cash Flows to Equity discounted at Cost of Equity i.e. Ke*

INCOME BASED DISCOUNTED CASH FLOWS

APPROACH
APPLICATIONS Generally used for firms likely to grow fast for few years & then stable growth ISSUES Easily Manipulated Not Directly Linked to Market Forecast Revenues & Costs a Challenge Not Ideal Method for valuing Firms with trouble, under-utilized assets

* Ke is calculated using Capital Asset Pricing Model (CAPM) adjusted for Small Company Premium & Specific Company Risk Premium if any

INPUTS Current Dividend Payout Growth in Dividends High Growth, Tapering Phase & Stable Growth Duration of the Phase Cost of Equity

INCOME BASED DIVIDEND DISCOUNT MODEL

APPLICATIONS Companies that pays out dividend without fail Companies where business model does not envisage growth but make reasonable cash

APPROACH
Contd.

ISSUES Applicable to limited number of companies Undervalues Companies that pays no or less dividends Investors, besides dividend also look for capital appreciation For Academic Purposes Only

INPUTS Current Value of Assets including Real Estate Current Value of External Liabilities Normalized Profit forecast for remaining period of Current FY Adjustments w.r.t non-realizable/redundant assets/liabilities

ASSET BASED NET ASSET VALUATION

APPROACH

APPLICATIONS For Strategic Investments For holding Companies Applicable for companies with significant tangible assets & Start Ups

ISSUES Limited Applicability for Operating Entities Not used when investments are financial in nature

INPUTS Identification of similar Transactions or Listed Companies; the former is preferred Deriving Various Multiples P/E, P/BV, EV/EBITDA, EV/Sales Adjustments to Multiples Illiquidity Discount, Size Premium, Execution Risk, Control Premium if applicable Applying the resultant multiple to get Enterprise Value/ Equity Value of the company

RELATIVE VALUATION RELATIVE VALUATION

APPLICATIONS The most widely practiced approach as based on actual transactions

ISSUES Difficulty in finding similar Listed Companies/ PE/ M&A transactions

 Final

Valuation is a Derivative of Mathematical Weights applied to various approaches & Professional Judgment

REACHING A CONCLUSION ON VALUATION

Both methods involve subjectivity Final Valuation should prove the test of

Common Sense & Reasonableness

Last but not the least, parties concerned

Negotiate hard on arriving at a Value of the Company but the call is largely a gut feel valuation by the investor

Duration of Private Equity/ Venture Capital Investment normally ranges from 3-7 years
EXIT OPTIONS IPOs Mergers & Acquisitions Management Buy-out Sale to Another Fund Buyback by Promoter/ Company Stock Market
In case of Buyback by Promoter/Company , the value at which PE Fund would exit is IRR or market-based and is pre decided at the time of investment on a certain valuation

EXIT OPTIONS AVAILABLE TO PRIVATE EQUITY FUNDS

SAMPLE CASE STUDIES

About the Company

Comments

Initially, with a 2-digit topline & 140 stores, intended to come out with an IPO for INR 500 million for fund requirement to Scale-up the number of Stores Taking into account the Capability of Management, Scalability of the business vis--vis requirement of funds, the Company was advised to Hold the IPO plans

SAMPLE CASE A Retail Garment Chain with panIndia presence

STUDY I

Advised to go for Private Equity in phased manner for better valuations for each fund raising
Inherent Business Strengths: Own manufacturing unit, sourcing from China, Economies of scale, Exclusive Business Outlets on Franchisee basis Business scalability projected for each year hence was achieved in a quarter; thus resulting in growth in stores from 140 to 1,000 & Valuation from INR 3,750mn to six times in one year

About the Company

Comments

Raised Funds to the tune INR4,400mn via Private Equity Route to fund acquisition of more Hospitals in phases

SAMPLE CASE

Peculiarity in terms of raising comparatively higher money for lesser dilution on a future multiple

STUDY II

A South India based Hospital Chain

Leveraged the advantages of funds flow from Real Estate owned by the Hospital to make it Debt-free in 2 years
Thus, enabling the company to embark on capital intensive, long gestation projects with assured funds supply when needed

VALUATION IS TEMPORARY BUT CONTROL IS FOREVER