Urgent Announcement - CFA Institute Research Challenge in India

One of the handy and simple looking valuation methods is balance sheet based valuation. While for a business with high intangible value(s) e.g. brands, technologies, patents or any other competitive advantage, discounted cash flow may be better methodology, there are only handfuls of such high quality businesses. Majority of the businesses are commodity by nature earning just cost of capital over a business cycle due to cyclicality, capital intensity and lack of any major competitive moats. Balance sheet method should be used for valuation for majority of such businesses.
In balance sheet, net worth or book value represents the value for shareholders. However the perils of book value are numerous assumptions used in accounting and excessive focus on historical costs. While book value based valuation looked very simple, it may not represent fair value. It needs various adjustments to arrive at the estimate of a fair value.
Few key adjustments to the book value should be –
o Discount for any doubtful debtors, nonperforming assets and other non-recoverable current assets;
o Market value of assets like investments, Land & Buildings with illiquidity discount, if warranted;
o Proportionate fair value of any joint venture or subsidiary against the book value of investments.
o Replacement cost of the capital intensive capacities.
Any qualitative and sustainable aspect of plant implementation or operations should be considered for premium or discount to the replacement cost of assets, if it provides any long term cost (dis)advantage compared to the competition. Once we analysis and make these adjustment to the reported book value, it should give us estimate of fair value for the business.
Happy investing!!!
Pramod Dangi, CA, CFA

(Pramod Dangi, CFA, CA is Vice President (Investment Advisory & Family Office) at TrustPlutus Family Office & Investment Advisers (India) Private Limited.)

Authors’ note: Because this article was prepared by the author in his personal rather than organizational capacities, the views expressed in this article are those of the author alone and do not necessarily reflect the positions of either the TrustPlutus Wealth Managers (India) Private Limited and TrustPlutus Family Office & Investment Advisers (India) Private Limited , nor their policies and practices.

Understanding Competitive Advantage of business for Valuation

Team India_Research Challenge — Mon, 25 Sep 2017 08:41:40 +0000

Comparison of business with other peers is an important tool in understanding the real value of any company. A company’s financials on a standalone basis do not show any picture of the company’s real value. E.g. Company A with a profitability of 25% is not necessarily a better performing company than a company with a profitability of 10%. i.e. We need to see the company’s performance vis-a-vis its peers in the same industry or same business segments. In the example above, Company A could be grossly underperforming as profitability of its peers could be in higher 30s. Consequently, Company B could be operating in an industry wherein the average profitability is only 5%-6%. Hence, whenever we have do a business valuation, apart from the DCF method, we also need to conduct a relative business valuation of the company. Comparables like Price / Earnings, Enterprise Value / EBITDA, Enterprise Value / Sales. Price / Book Value and many more; which multiple to use depends on the type of industry in which the company operates.

E.g : The EV/EBITDA ratio is a financial metric that measures the return a company makes on its capital investments. This ratio is often preferred to other return metrics because it evens out differences in taxation, capital structure and asset classes.

Similarly, the P/E ratio is a valuation metric that compares a company’s stock earnings per share (EPS) to its current market price. This metric is widely known and used as an indicator of a company’s future growth potential. The P/E ratio does not reveal a full picture, and it is most useful when comparing only companies within the same industry or comparing companies against the general market.

Another important aspect here is the sustainability of the business and the margins. Significantly higher margins might not be sustainable for longer term of the business and the same needs to be further investigated and factored in to the business valuation by applying discounts. On the other side, if the company has a Unique Selling Proposition (USP) as compared to its peers in the same industry (say technical know-how, distribution network, operational expertise, etc) shall command a premium which again should be factored into the business valuation.

— Vishal Bhambhani, CFA

(Vishal is a CFA Charterholder and an MBA-Finance from Sydenham Institute of Management Studies, Research and Entrepreneurship. He has over 8 years of experience in the investment industry. Currently, he is working as Deputy Vice President at Blend Financial Services Ltd. In the past he has worked with Centrum Capital, SBI Capital Markets, IL&FS Maritime Infra, etc. He is also a volunteer for CFA Society India and a mentor for the CFA Institute Research Challenge)

Presentation Venue – Laptop’s and Portable Device

Team India_Research Challenge — Fri, 02 Dec 2016 07:04:22 +0000

http://www.iaipirc.org/announcements/presentationvenue-laptopsandportabledevice-5