This document discusses valuation and provides an overview of valuation approaches, methods, and considerations. It defines valuation as the skillful application of techniques to determine the economic value of a business/asset. The key approaches covered are asset, income, and market approaches. Specific methods discussed include discounted cash flow, capitalization of earnings, and market multiples. The document also provides two case studies on brand valuation and acquisition valuation.

1. .
A Tryst with Valuation
GDA Management Consulting Pvt. Ltd
GDA
Consulting
14th September, 2014. Pune 1

2. Why Valuation?
Merger/
Demerger
Private Equity
IPO
Family
Separation
Portfolio Value
of Investments
Regulatory
Approval
Litigation
Test of
Impairment
Buyback of
Shares
Purchase / Sale
of Business
Valuation is
essentially for
a given
purpose.
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3. What is value?
Value is what you get ;
Price is what you pay
– Warren Buffet
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4. Value drivers
Assets
P&M, Land &
Building, Other
Fixed Assets etc.
Income
Revenues, Cash
Flows, EBIDTA,
PAT etc.
Intangibles
Brand, Intellectual
property Rights,
Trademark,
Copyrights,
Employee skill etc.
Market
P/E multiples,
Revenue Multiples
etc,
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5. Everything that can be counted does not necessarily count; everything
that counts cannot necessarily be counted
- Albert Einstien
……..But everything that can or cannot be counted can be necessarily
valued
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6. What is Valuation?
• Skillful application of certain
scientific techniques to
determine the “value” of a
business /asset/
project/company etc.
• A reliable estimate of
economic value
Science
Reliability
Skill
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7. Valuation considerations
• Purpose of valuation
• Background of the Promoters, Management & Company
• Market Conditions- Present & Future
• Element of bias
• Statutory requirements such as Compliance with Income Tax Act,
FEMA, RBI Regulations etc.
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8. Valuation Approaches
Asset
Based
Approach
Income
Based
Approach
Market
Based
Approach
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9. Methods of Valuation
Asset based (Net
Asset method)
• Book Value
• Market Value
• Replacement Value
Income Based
• Discounted cash
flow method
• Capitalization of
earnings method
Market based
• Market mutiples
method
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10. Net Asset Method
• All Assets (-) Liabilities excluding Reserves and Accumulated
Losses
• Book Value Vs. Replacement Value Vs. Market Value Vs. Distress
value
• Impact of Off Balance Sheet items
• What about Intangible Assets?
• Involvement of Government registered valuors
• Historical method; does not capture the potential
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11. Discounted Cash Flow
• Net Present Value of future cash flows discounted by Weighted
Average Cost of Capital(WACOC)
• Realistic business plan and estimation of future cash flows
• Relevance of discounting factor
• Terminal Value
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12. Market Multiples method
• Revenue/EBIDTA/P.E Multiple
• Broader method of valuation
• Takes into consideration, market and competition
• Thumb rule method
• Multiple –a product of micro and macroeconomic factors
• More relevant for large ticket transactions
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13. Intangibles
Separately identifiable although not tangible
Can be sold /transferred/licensed/rented
seperately
Can be recognised legally
Can arise from a legal/contractual right
Is capable of offering a competitive advantage
to its owner
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14. Recognition of Intangibles
for Valuation purpose
 Definition of intangible asset + Future economic benefits + Cost can
be measured = Recognized as intangible asset
 Recognition of an Intangible is a relatively challenging process
 Differentiation factor must be established
 Significant competitive advantage must be present
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15. Methods of
Intangibles Valuation
Intangibles
Valuation
Income
Relief from royalty
Excess Earnings
method
Cost
Reproduction Cost
Method
Replacement Cost
Method
Market
(Sales Comparison
Method)
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16. Deciding the method
of valuation
Is the
Company a
Going
Concern?
Is the
Company
Capital
intensive?
Is the
Company
listed/unlisted
?
Are there
Comparable
Companies in
the Market?
Are there any
significant
intangibles
associated with
the Company?
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17. Valuation- More of an art;
less of a science
• Valuation is never Precise;
• Uncertainties of;
– Assumptions
– Firm-specific factors
– Macroeconomic factors
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18. Other Value Drivers
Final Price is a result of negotiations
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Distress Sale
Illiquidity
Discount
Final
Value
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19. Importance of reliable
valuation
Loss of
opportu
nity
Loss of
capital
Legal
repercu
ssions
Long lasting
negative impact
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20. Responses to uncertainty
• Better Valuation models
• Combination of two or more methods
• Valuation ranges
• Judgment and skill of valuor
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21. Case study 1
Brand valuation
• Background:
– Brand valuation of one of the top 10 consumer product Brands
– Six product lines; existence of two decades
– Scope extended to understanding the industry, the market, the strategies
employed for Marketing, Pricing and Distribution, and last but not the least,
competitors; not just logo or registered trademark
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22. Case study 1
Brand valuation
• Methodologies: used
– Brand earning Multiple Method
– Terminal value method
– Discounted Cash flow method
 Discussion of Brand Earning Multiple Method
 Brand Value = Average Recurring Annual Brand Earnings * Brand Earning
Multiple
 Brand Earning Multiple based on Sovereign Earning Multiple P.E multiple and
Brand Strength score of the Company
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23. Case study 1
Brand valuation
• Challenges involved:
– Calculation of Brand Strength Score: Scoring of the Brand on 7 different
parameters vis-à-vis it comeptitors; 14 in nos; Substantial subjectivity involved
– Since Company under consideration incorporated multi Branding strategy, it was
important to remove the effect of multibrands from their revenue.
– Accounting for remuneration of non brand capital while calculating Average
recurring Brand earnings
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24. Case study 1
Brand valuation
• Valuation Conclusions
– Detailed discussions with the Company and understanding of operations
– Understanding of Brand and Non Brand Operations
– Adopting a “devil’s advocate” perspective while evaluating each assumption
– Justifying the value using two other methods
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25. Case study 2-
Acquisition of a Company
• Background:
– Acquisition of a pharmaceutical Company engaged in the manufacture
of intravenous fluids
• Challenges Involved
– Post mortem exercise
– Valuation after the acquisition was carried out
– On slump sale basis by offering a lumpsum amount for assets to be
purchased
– Valuation done for the acquiring Company
– Assesment of Goodwill
• Methodology used:
– Involvement of Government Approved Valuors- Civila nd Mechanical
– Valuation of Goodwill on the basis of past financials
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26. Case study 2-
Acquisition of a Company
• Valuation Conclusions:
• Acquiring Company had negotiated an amount on the basis of WDV of Assets +
Premium
• Identification of recently purchased Plant and Machinery which was overvalued in
the books
• Acquring Company had paid excess amount for acquiring plant and Machinery
• Ideally Goodwill=Premium
• However, Goodwill was calculated as per widely accepted valuation methods such
as Super Profits Method and capitalisation of profits method
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27. Case study 3-
Valuation for seeking Equity
• Background
– Valuation of an I.T Company- into niche software development
– Objective was to seek equity infusion of a strategic international Company ins
imilar line of Business
• Methodology used: Weighted Average of
• Discounted Cash Flow method
• Net Assets Method
• EBIDTA Multiple method
• Challenges involved
• Very niche offerings
• Very few comparable Companies
• Non linear growth pattern prevalent in , not only the Company , but also the
industry
• Calculation of Future projections- difficult
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28. Case study 3-
Valuation for seeking Equity
• Approach to valuation
– Detailed discussions with the Company
– Trying to understand the investors’ perspective
– Strategy involved in such similar transactions studied
– Justifying of assumptions for the purpose of valuation proved to be a real
challenge which was successfully addressed
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29. Takeaways
• Valuation is essentially for a given purpose.
• Value is what you get ; Price is what you pay
• Valuation need not be Precise
• Valuation is a reliable measurement of economic value
• Value changes with perspective
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30. Need for Valuation
• Comparison with peers: Self Assessment
• Succession planning
• Reduction of cost of capital
• Assess marketability of business
• Strengthen credibility
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31. About GDA Consulting
• Consulting arm of G.D.Apte & Co. Chartered Accountants
• Team comprises Chartered Accountants, Management
Professionals, Financial experts from industry, Ex-Bankers, Legal
experts, technical experts etc.
• Over three decades of experience in Valuation
• Body of Work comprises
– Assistance in setting up new units
– Techno Economic Viability studies
– Debt syndication/ Arrangement of Private equity
– Assistance in Merger/Demerger cases
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32. GDA Consulting
Pune
GDA House
Plot No. 85, Bhusari Colony (Right)
Paud Road, Pune - 411 038, India
Email : ranjeet.kulkarni@gdaconsulting.in
Phone : +91 20 2528 0081
Fax : +91 20 2528 0275
Mumbai
Office No.83 – 87 ,8th Floor, B Wing ,Mittal Tower,
Nariman Point, Mumbai, India
Phone : +91 22 4922 0555
Bangalore
D-II, 207, Shriram White House,
15th Cross, 6th Main, R.T. Nagar,
IInd Block, Bangalore - 560 032
Phone : +91 80 2354 2436
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