Investment Valuation in India

Aluminium The most commercially mined aluminium ore is bauxite, as it has the highest content of the base metal. The primary aluminium production process consists of three stages. First is mining of bauxite, followed by refining of bauxite to alumina and finally smelting of alumina to aluminium. India has the fifth largest bauxite reserves with deposits of about 3 bn tonnes or 5% of world deposits . India’s share in world aluminium capacity rests at about 3% . Production of 1 tonne of aluminium requires 2 tonnes of alumina while production of 1 tonne of alumina requires 2 to 3 tonnes of bauxite. The aluminium production process can be categorised into upstream and downstream activities. The upstream process involves mining and refining while the downstream process involves smelting and casting & fabricating. Downstream-fabricated products consist of rods, sheets, extrusions and foils. Power is amongst the largest cost component in manufacturing of aluminium, as the production inv...

THEORIES of MERGERS The theories of mergers can be summarized into three major explanations. The first category is synergy or efficiency, in which total value from the combination is greater than the sum of the values of the component firms operating independently. Gains to Target Positive Gains to Acquirer Positive Total value Positive Hubris (the second category) is the result of the winner’s curse, causing bidders to overpay; it postulates that value is unchanged. Of course, in a synergistic merger, it would be possible for the bidder to overpay as well. Gains to Target Positive Gains to Acquirer Negative Total value NIL The third class of mergers comprises those in which total value is decreased as a result of mistakes or managers who put their own preferences above the well-being of the firm, the agency problem. Gains to Target Positive Gains to Acquirer Negative Total value Negative So as we see, gains to targets are always positive. ...

ARBITRAGE in a MERGER TRANSACTION When a merger or takeover is announced, arbitrageurs sell short the stock of the acquiring company, and take a long position (buy) in the stock of the target company. Because of the risk that the transaction may not be completed, the price of the target stock may not immediately rise to the full offer price. So arbitrageurs may gain as the price of the target stock rises toward the offer price. Indeed, the target may resist, driving its price even above the initial offer price. Another possibility is that another firm may make a competing bid at a richer price. An example will illustrate the arbitrage operation. When a tender is announced, the price will rise toward the offer price. For example, bidder B selling at Rs. 100 may offer Rs.60 for target T, now selling at Rs.40 (a 50 percent premium). After the offer is announced, the arbitrage firm (A) may short B and go long in T. The position of the hedge depends on price levels after the announcement. ...

LEVERAGED BUY-OUT Leveraged buy-out is a corporate finance method under which a company is acquired by a person or entity using the value of the company's assets to finance its acquisition; this allows for the acquirer to minimize its outlay of cash in making the purchase. A leveraged buyout may also be referred to as a hostile takeover, a highly-leveraged transaction, or a bootstrap transaction. In other words a LBO is a company acquisition method by which a business can seek to takeover another company or at least gain a controlling interest in that company. Special about leveraged buy-outs is that the corporation that is buying the other business borrows a significant amount of money to pay for (the majority of) the purchase price (usually over 70% or more of the total purchase price). Furthermore, the debt which has been incurred is secured against the assets of the business being purchased along with the acquiring company. Interest payments on the loan will be paid from the fu...

Price/sales ratio Price-to-sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company's market cap by the company's revenue in the most recent fiscal year (or the most recent four fiscal quarters); or, equivalently, divide the per-share stock price by the per-share revenue. The metric can be used to determine the value of a stock relative to its past performance. It may also be used to determine relative valuation of a sector or the market as a whole. PSRs vary greatly from sector to sector, so they are most useful in comparing similar stocks within a sector or sub-sector. Also, since sales are less easy to manipulate as compared to earnings, price-sales ratios are more indicative of performance as compared to price-earnings ratios.

Capital asset pricing model The Security Market Line , seen here in a graph, describes a relation between the beta and the asset's expected rate of return. An estimation of the CAPM and the Security Market Line (purple) for the Dow Jones Industrial Average over the last 3 years for monthly data. The Capital Asset Pricing Model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified portfolio, given that asset's non-diversifiable risk. The CAPM formula takes into account the asset's sensitivity to non-diversifiable risk (also known as systematic risk or market risk), in a number often referred to as beta (β) in the financial industry, as well as the expected return of the market and the expected return of a theoretical risk-free asset. The model was introduced by Jack Treynor, William Sharpe, John Lintner and...

P/E Ratio The P/E ratio (price-to-earnings ratio) of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios. The reciprocal of the P/E ratio is known as the earnings yield. P/E Ratio = Price per Share / Earnings per Share The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The earnings per share (EPS) used can also be the "diluted EPS" or the "comprehensive EPS". For example , if stock A is trading at $24 and the earnings per share for the most recent 12 month period is $3, then s...

PEG ratio The PEG ratio is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and the company's expected future growth. PEG = (P/E Ratio) / (Growth Rate) A lower ratio is "better" (cheaper) and a higher ratio is "worse" (expensive) . A PEG ratio that gets close to 2 or higher is generally believed to be expensive, that is, the price paid appears to be too high relative to the estimated future growth in earnings. It is generally accepted that a PEG ratio of 1 represents a reasonable trade-off between cost (as expressed by the P/E ratio) and growth: the stock is reasonable valued given the expected growth. If a company is growing at 30% a year, for example, then the stock's P/E could be as high as approximately 30. PEG ratios between 1 and 2 are therefore considered to be in the range of normal values. The PEG ratio is commonly used and provided by various sources of financial and sto...

A hedge fund is An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). · Private fund, · Largely unregulated · Pool of capital · require a very large initial minimum investment · Illiquid investments as they often require investors keep their money in the fund for at least one year. · Managers can buy or sell any assets, · Bet on falling as well as rising assets and · Participate substantially in profits from money invested. · Charges both Performance Fees and Management Fees · Typically open only to qualified investors · Dominate certain specialty markets such as trading within derivatives with high-yield ratings, and distressed debt. Fees Charges both a performance fee and a management fee (also known as Incentive Fees) Generally referred as “2 a...

What is meant by Takeovers & Substantial acquisition of shares? When an “acquirer” takes over the control of the “target company”, it is termed as takeover. When an acquirer acquires “substantial quantity of shares or voting rights” of the Target Company, it results into substantial acquisition of shares. The term “Substantial” which is used in this context has been clarified subsequently. What is a Target Company? A Target Company is a company whose shares are listed on any stock exchange and whose shares or voting rights are acquired/being acquired or whose control is taken over/being taken over by an acquirer. Who is an Acquirer? An acquirer means any individual/company/any other legal entity which intends to acquire or acquires substantial quantity of shares or voting rights of target company or acquires or agrees to acquire control over the target company. It includes persons acting in concert (PAC) with the acquirer. What is meant by the term “Persons Acting in Concert (PACs)...