Investment Valuation in India

The US Government, through the US Treasury and Federal Reserve, stepped in to save the Fannie Mae and Freddie Mac; refused to do anything about Lehman Brothers, let Bank of America help Merrill Lynch save itself and threw AIG a lifeline. Why this partiality? There’s reason ! Lets see why! The Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC) all are Government Sponsored Entities (GSEs) and they are known by the names Ginnie Mae, Fannie Mae, and Freddie Mac. Each purchases mortgages from lenders to provide funds for mortgage loans. The agencies issue three types of mortgage-backed securities: mortgage Pass-through securities and collateralized mortgage obligations. and stripped mortgage-backed-securities. This process of combining many similar debt obligations as the collateral for issuing securities is called securitization. The primary reason for mortgage securitization is to incr...

The US Economy is weakening, why is Rupee depreciating (as compared to dollar) then? The rupee slumped to a five-year low of 47.10 in spite of the slowdown in the US Economy. Ideally when a country is in the slowdown the currency of that country should depreciate. Fine that India is slowing down too but is still growing at a rate more than the US. But why is the Rupee depreciating then. There is heavy dollar-demand from oil refiners and importers. Sentiment for the local currency was further dampened by losses on the stock markets on Monday (29-Sep-08). But the central bank intervened by selling up to $1 billion which helped prop up the rupee. We have the inflation climbing the ladder very fast with remote signs of coming down. The crude oil prices are extremely volatile. The GDP forecast is also trimmed every now and then. The current account deficit is widening. With not many positives in sight, traders see the rupee trading in the 47-per dollar range for the next few days. At the cu...

Accounting Impact From an accounting perspective, the focus in the United States has been on: • Convergence • Moving from rules-based standards to principles-based standards • Trending away from recording assets and liabilities at historical cost and moving to fair value. Convergence With the global environment in which companies operate, the FASB and the International Accounting Standards Board ("IASB") have dedicated themselves to improve financial reporting by evaluating the differences between US GAAP and IFRS and reducing those differences where possible. The two bodies are currently in the short-term phase of a longer-term convergence project. The goal of the short-term project is to reduce a variety of differences between US GAAP and IFRS. The short-term projects are those where significant differences do not exist and the Boards believe that they can reach agreement without a major overhaul of the current requirements. In addition to the convergence project, the ...

International Impact of SOX Foreign Private Issuers ("FPIs") registered on US Exchanges must comply with the Act in the same manner in which a US company does, with limited exceptions. The Act introduced additional requirements that many foreign companies did not anticipate when first deciding to enter US capital markets. As a result of these and other environmental changes, the direct and indirect costs of being an SEC registrant have increased and some foreign companies are reconsidering the US capital markets as a place to raise capital. Additionally, the PCAOB regulates the non-US auditors who have clients that are listed on an exchange in the US and registered with the SEC. This makes the non- US audit firms subject to the regulatory requirements, inspection process, and penalties dictated by the PCAOB. In response to the increase compliance costs, in March 2007, the SEC finalized rules allowing Foreign Private Issuers to deregister with the SEC if they meet certain ...

Sarbonex Oxley Act (SOX) or Investor Protection Act 2002 The Act was written by Senator Paul Sarbanes and Congressman Michael Oxley and enacted by the Congress of the United States in response to corporate management, accounting, and reporting scandals. The Act has heightened the role of regulation within the accounting industry and with it the role of the US Securities and Exchange Commission ("SEC") and the newly created Public Company Accounting Oversight Board ("PCAOB") in that regulatory process. The Act represents the biggest change in the US corporate governance and reporting since the federal securities laws were first enacted in 1933 and 1934. The Act has required the SEC to issue more regulations within six months than the SEC had ever issued before in a similar period. Among other things, the Sarbanes-Oxley Act establishes new or enhanced standards for corporate accountability and has increased penalties for corporate wrongdoing for SEC registrants. The S...

Valuation is a critical part of the merger process. A deal that may be sound from a business standpoint may be unsound from a financial standpoint if the bidder firm pays too much. The purpose of a valuation analysis is to provide a disciplined procedure for arriving at a price. If the buyer offers too little, the target may resist and, since it is in play, seek to interest other bidders. If the price is too high, the premium may never be recovered from postmerger synergies. These general principles are illustrated by the following simple model. ANALYSIS Mergers increase value when the value of the combined firm is greater than the sum of the premerger values of the independent entities. NVI = V BT – ( V B - V T) where NVI = net value increase V B = value of bidder alone V T = value of target alone V BT = value of firms combined A simple example will illustrate. Company B (the bidder) has a current market value of Rs.40mn. Company T (the target) has a current market value of Rs.40mn. ...

Lehman Brothers was founded in 1850 by two cotton brokers in Montgomery, Ala. Lehman Brothers (ticker symbol: LEH) is headquartered in New York, with regional headquarters in London and Tokyo, and operates in a network of offices around the world. The Company operates three business segments: Capital Markets, Investment Banking and Investment Management. On September 14, 2008 Lehman Brothers Holdings Inc. (“LBHI”) stated that it has filed a petition under Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York. None of the broker-dealer subsidiaries or other subsidiaries of LBHI was included in the Chapter 11 filing and all of the U.S. registered broker-dealers will continue to operate. In conjunction with the filing, LBHI intends to file a variety of first day motions that will allow it to continue to manage operations in the ordinary course. Those motions include requests to make wage and salary payments and continue ot...

A convertible bond (CB) is debt at issuance and through its life, until converted into shares. Conversion into shares happens if the share price is above a certain share price (“conversion price”) either at maturity or through the life of the bonds. Typically on the day the convertible bond is priced, the volume weighted average price of the shares or the closing price of the shares is taken as a base price (“reference price”). Conversion price is then calculated as (reference price x (1 + conversion premium)) , where the conversion premium is typically between 10% and 30%. The number of shares per bond is fixed by dividing the denomination of the bond with the conversion price. This defines the maximum number of new shares that can be issued at any time, limiting maximum dilution for existing shareholders. In order to see how this works, let us take a simple example: Assumptions Issue Amount: USD 25m Reference price (closing price of shares): USD 100 Denomination of bonds: USD 100,000...

Sales are the lifeblood of any company, and getting a reasonable estimate of sales revenue scale and growth is highly critical in any ensuring business planning exercise, such as capital investment decisions, hiring of staff, expansion of business operations and allocation of operating budgets, etc. Hence, forecasting demand for a company’s products and services, and the resulting revenues accrued is probably the most critical step a financial analyst needs to undertake when building a financial model. In order to arrive at a realistic and reasonable revenue forecast for a business, a good financial analyst should conduct a detailed revenue modeling / demand analysis of a company’s products and services, by examining its usage potential and a customer’s willingness and ability to pay. A demand analysis would entail determining current demand and using assumptions for demand build up to predict future demand over the time period of the financial model. There are a number of qualitative ...

An Equity-Linked Note (ELN) is an instrument that provides investors fixed income like principal protection together with equity market upside exposure. An ELN is structured by combining the economics of a long call option on equity with a long discount bond position. The investment structure generally provides 100% principal protection. The coupon or final payment at maturity is determined by the appreciation of the underlying equity. The instrument is appropriate for conservative equity investors or fixed income investors who desire equity exposure with controlled risk. An Equity-Linked Note (ELN) is a debt instrument that differs from a standard fixed-income security in that the coupon is based on the return of a single stock, basket of stocks or equity index (the “underlying equity”). An ELN is a principal-protected instrument generally designed to return 100% of the original investment at maturity, but diverges from a standard fixed-coupon bond in that its coupon is determined by ...

Impact of Inflation on Financial Statements Fixed Assets under historical Cost accounting – Since the fixed assets are valued at historical cost (in most countries), the assets are stated at a much lower figure than their current replacement costs. This makes the company vulnerable to takeover bids and leads to lower valuations for the shareholders. Depreciation – Since the assets are undervalued, consequently the depreciation on such assets are also undervalued. This leads to distortions in the make or buy decisions of the assets. This consequently overstates the profit of the enterprise. In case of inflation, the cost of raw materials and goods purchased for re-sale are rising. Under the cost concept only cost of purchase is taken to the Income Statement. Generally, in case of Inflation, the fair value is greater than the cost and this difference between the cost and the fair value of such goods is also taken to the Income Statement as Holding Gains. Consequently the profit is agai...