Valuation – What to expect and methodology

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We as a company among other things provide professional help in share transmission. Ancestral shares are often quite difficult to claim due to various problems and individuals find it quite difficult to convert the shares quickly. Alongside our other division SMB Enablers Pvt. Ltd., provide services to emerging companies in the field of corporate finance. Along the line, we do enterprise valuation for the companies. We regularly value listed companies purely based on publicly available documents and compare them with the market capitalization of the respective companies. We thought we will share our notes on the company with everyone.

The website on Share Recovery:

DISCLAIMER This Blog,its owner  & contributors are neither a Research Analyst nor an Investment Advisor and expressing the views only as a valuation enthusiast and an Investor in Indian equities. He/She is not responsible for any loss arising out of any information, post or opinion appearing on this blog. Investors are expressly advised to treat the blog entries as one more opinion on the subject company and are expressly advised to do own due diligence and/or consult financial consultant before any investment decision. Author of this blog not providing any paid service and not sending bulk mails/SMS to anyone or asking for email ids or contact details. These are just ballpark enterprise valuations. We do not claim the value provided by us to be correct. These are based on the past ten years financials which has no relevance to the future whatsoever. We are not providing any recommendation on the stocks concerned. In fact, the market price is of no relevance to us and we just provide the enterprise value debt component and shareholders value. And its future business prospects.

Photo Courtesy: Corporate Finance Institute

Methodology of Valuation

  1. Revenue projection:- CAGR is calculated for ten years, seven years, five years and three years. To these last financial revenue growth and last four trailing quarters growth are taken Based on these and based on the economy, industry and future prospects as envisaged by us we provide a growth percentage
  2. Operating profit margins are estimated taking all expenses into account except interest and depreciation. The percentage is arrived at after calculating in the manner discussed for sales growth. Based on these and based on the economy, industry and future prospects as envisaged by us we provide a operating profit percentage.
  3. Based on these growth rates, projected sales and projected operating margin (other than other income) is calculated and EBITDA is arrived at.
  4. The effective rate of depreciation is calculated in a similar manner (on the whole block of assets and not on the individual category of assets) such as building, machinery, etc.
  5. In a similar manner, borrowings, capital expenditure, other income estimates etc., are calculated.
  6. Various qualitative parameters are also given due weightage. These include enterprise value to five years of re-cash flow, cash to enterprise value, contingent liabilities to net worth. Piotroski score (the score that indicates the financial strength of the company). G-factor (the number that indicates growth potential) cost return capital employed and past equity, interest coverage, current ratio, working capital days etc.
  7. Cost of equity calculation is as follows:-
    a) 6.5% being the ten-year bond rate of the Government of India, the equity risk premium is considered at 6.01%, being the equity risk premium of India as calculated by Prof. Aswath Damodaran. This will be modified every six months.
    b) Based on the exports, respective country’s risk premium and risk free rate, reduction/premium to cost of capital is applied.
    c) Based on qualitative parameters and just on foreign exchange earnings percentage, this cost of capital of 12.51%  is either increased or decreased.
    d) Based on these and based on the effective rate of interest weighted average cost of capital is arrived at.
  8. These numbers provide us with the basis for the calculation of enterprise value in accordance with discounted cash flow valuation modelling.
  9. Terminal growth rate is not calculated but is a ballpark number

Based on these discounted cash flow valuation is worked out to arrive at Enterprise value. (EV)

Shareholders’ Value = EV+Investments+Balance Sheet Cash – Total Debts. We compare our shareholder value and market capitalization as per NSE/BSE.

This method will be consistently followed for all the companies we will be valuing.

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