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Valuation of Plant & Machinery

BASIC PRINCIPLES OF VALUATION


PLANT & MACHINERY IN INDIA
Mukund V. Puranik PVAI(India)
Philosophy of PME (Plant, Machinery & Equipment)

Specific utility of assets

Estimation in monetary terms the worth of existing PME in


consideration with the contribution to the profitability, market
situation, type of PME & standard of maintenance

Determination of such worth is a valuation

PME valuation is largely qualitative and heavily dependent on


valuers judgement and justification
Purpose of valuation.

Whether condition of machinery can really satisfy the purpose


of valuation.

Assessment - whether any buyer can buy the existing set up as


per valuation report or financial institutes can offer loan to
existing owner for further expansion as per valuation report.
Purpose of Valuation
Market: Value by comparing asset with identical or similar.

Insurance: Amount at which machinery can be insured based


on policy. This will call current replacement cost.

Bank Finance: To get finance for existing or new project.

Lease Finance: To take or offer plant on lease.

Liquidation: The net amount that can be realized if business is


terminated and assets sold piecemeal on as is where is basis.
Take Over: To know the total investment required

Merger: To know the exact investment with other plant

Sale /Purchase: Sale or purchase the plant against the return

Rating: CRISIL or MOODY rating, Stock market rating etc

Insolvency: Recovery of loan by selling assets

Scrap: To work out the scrap value of junk machinery


Phases of Valuation Procedures

Phase I: Terms of reference

Phase II: Strategy of valuation

Phase III: Physical verification (survey & inspection)

Phase IV: Data collection & valuation analysis under


different approaches to value

Phase V: Reconciliation
International Valuation Std. 105

Market Approach: Direct sales comparison method (Rule of


thumb)

Income Approach: Capitalization of earnings


method(Discounted future earning)

Cost Approach: Replacement cost new method (Book value


method)
Main Factors To Be Considered
Availability of reliable information needed

Appropriateness of method in view of nature of asset & purpose of


valuation should be given emphasis.

Respective strength and weakness of possible approach and method

Observable market information in all these methods is preferred.


Price information from an active market is generally strongest evidence
Role & Function of a valuer
1)Valuer has to be fully conversant with the process and types of
machinery & equipment.

2)Valuer has to personally visit the site and carry out survey

3) Valuer has to take necessary photographs with date & Selfie.


Photo of valuer at site works as evidence of presence.

4) Description wherever necessary to be added in the form of


notes to prepare proper valuation report with required
photographs and justification.
5) The inventory of various equipment's /machines in different
departments and getting detailed information from concerned staff/
Manager of each section to know in detail about the working,
productivity, accuracy, accident history etc.

6) Valuer needs to get maximum information from people from capital


purchase, finance and other related managers to get the complete
perspective of the company.

7) Valuer has to note down the specific contradictions also supporting


details in relation to the purpose of valuation which will help valuer in
final report.
Depreciation
It is usual wear & tare of normal working of machine/equipment.
There are 3 types of Computing Depreciations used in practice.

A) Observed deterioration

B) Straight Line Method

C) Written Down Value Method (Decline & Balance)

Scrap value is one of the most important consideration in


computation of depreciation irrespective of method & more
important in case of high value machine
Observed Deterioration
Condition Depreciation
New (N) 0 5
Excellent (E) 6 10
Very Good (VG) 11 20
Good (G) 21 50
Fair (F) 51 60
Poor (P) 61 90
Scrap (S) 91 100
As per the companies act 2013, depreciation is calculated on useful
life of the asset. Schedule II of companies act 2013 provides useful life
of the asset. Till date valuer used to calculate depreciation as per
schedule IV of companies act 1956. From 1st April 2014 depreciation
has to be worked as per schedule II of companies act 2013

Income Tax website gives the depreciation rates & useful life for
various assets. There are many handbooks giving different rates but it
is advisable to follow income tax guidelines for valuers safety

Calculations can be validated from IT site ready calculator

Valuer can always deviate from std. depreciation rates but he should
justify such change
RBI Wholesale Price Index (WPI)
Published by Economic Advisor Ministry Of Commerce & Industry.

WPI captures price movement in more comprehensive way.

Widely used by Government, Banks, Industry & Business Circles.

Important monetary and fiscal policies are linked to the WPI

It is in use since 1939 & published regularly from 1947.

Current WPI has a base year 2004-2005 launched on 14.09.2010

The current WPI in India is with base year 2004 2005 = 100.
The WPI has a basket of 676 items with 5482 quotations in data bank

This is published every month on RBI website

Use of WPI leads to authentic valuation.

Valuer should also be aware of 8 core industries Coal, Crude Oil,


Natural Gas, Refinery products, Fertilizer, Steel, Cement & Electricity and
IIP (Index of Industrial Production) since these are major contributors of
Indian economy.

Machinery valuation related to these core industries will also be


affected by IIP.
VALUATION REPORT
For Submission To
XXXXXXXXXXXXX (Clients Name Location & Address)
Description Page No.
INDEX
Cover Page
Summary of valuation report & valuation Certificate
Valuation approach
Notes to valuation report including Assumptions, limitations
in valuation, basis of valuation, Documents pursued,
observations during inspection.
Clauses of limited liabilities with terms and conditions.
List of plant & machinery Data (Observed / Received)
Listing of Data
No Description Invoice # Years Qty Acqn. cost Excise Total

Above list should be based on invoices forwarded by the bank as per


their available data or checking the details from the company officials. In
case of NPA above table & details may not be possible so valuer has to
use his own judgement supported by justifications.
Calculations
Item Total A.V/W.Fdn IEC Life Age IR RV Dep. REP CMV

Total As per invoice after clubbing.


A.V/W Fdn Acquisition Value & Foundation Cost. (Total + Foundation)
I.E.C. Installation, necessary fabrication, E&C expenses etc.
I.R. Incremental Ratio. (From RBI wholesale price index)
R.V. Reinstatement Value. (A.V/W.Fdn + IEC) X IR = RV
DEP Depreciation charged.
REP Repair charges.
C.M.V. Computed Market value. [R.V. (DEP + REP)] = CMV
Summary of Valuation Report
1 Name of the client XXXXXXXXXXXXXXXXXXX
Address of machinery location XXXXXXXXXXXXXXXXXXXXXXXX
2 Intended user XXXXXXXXXXXXXXXXXXXX
3 Purpose of valuation Value of movable property to determine fair
market value, realizable value & distress
value
4 Date of inspection XXXXXXXXXXXXXXXXXXXXXXXX
5 Date of valuation XXXXXXXXXXXXXXXXXXXXXXXX
6 Persons present during valuation XXXXXXXXXXXXXXXXXXXXXXXX

VALUATION CERTIFICATE
It is certified that present valuation of immovable asset mentioned above is arrived as below.

Asset Fair Market Value Rs.


Plant & Machinery XXXXXXXXXXXXXXX.XXXXXXX
In Words XXXXXXXXXXXXXXXXXXXXXXXXXXXX
Terms & Conditions Usually Applicable
1) The valuation is carried out at the request / order of XXXXXX

2) Any liability arising out of use of this report shall be maximum


50% of the professional fees actually received by us.

3) Appearance in the court of law / statutory authority will be


charged at actual cost incurred and professional time spent.

4) Valuation is our opinion based on document & information


provided, site visit, local information. Hence NO 3rd party
interest, pecuniary losses, liquidity damage, or any such losses
will be considered whatsoever if applied for any purpose.
5) Accuracy of valuation is limited to extent of information and
documents supplied by client.

6) No liability of any document of client whatsoever will be considered.

7) Government policies, International currency rates, natural calamities


& market forces will affect the valuation.

8) Valuer is not responsible for any hidden matters like lien, Income tax
attachment, court order, non payment of PF or any other outstandings

9) Use of this valuation report other than the purpose of valuation as


per order is a responsibility of client at their cost
Difficulties in valuations
1: In sufficient data available for valuation & analysis.

2: Asset register is not available or never maintained especially in


NPA case.

3: Concerned Technical & commercial executives / staff not


available during inspection.

4: Insufficient information is normal phenomena.

5: Hidden liabilities & history are never disclosed.


6: Details of loan for purchase of machinery is not available.

7: Various pressures on valuer to either enhance or reduce the value.

8: Many a times for NPA cases electric supply is not available.

9: Change of technology affects valuation.

10: Tendency to give same work to different valuers in order to accept


the report nearest to clients expectation.
CASE 1 Sample Photos
Bauxite Manufacturing Plant NPA case.
Valuation for Market & Distress value.
Location near Kolhapur (Maharashtra)
CASE 2 Sample Photos
Gear Manufacturing Plant (Production)
Valuation required by company
Location :- Near Satara (Maharashtra)
CASE 3 Sample Photographs

Hot Rolling Steel Plant (NPA Case)


Scrap Valuation by bank
Location :- Bellary Industrial Area (Karnataka)
THANK YOU