Investment Valuation in India

Here are some valuation updates that have been reported in the global media. Stripe Payments services startup Stripe, founded by brothers Patrick and John Collison has taken another round of funding from Visa. The companies enables the apps and online stores to take payments from anybody, anywhere. It works with online companies that accepts payments through Credit cards while being totally invisible to end users. Visa has bought a stake in Stripe that values the company at $5 Billion and will leverage on Stripe's technical expertise to work on new kinds of digital payments. This is at a time when Visa is facing competition from organisations which are more mobile friendly when it comes to digital payments. On the other hand, Stripe will leverage on Visa's security systems to protect the users' financial information.   

A bond carries a specific rate of interest which is also called the Coupon Rate. For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be Rs 100 x 8% = Rs 8 per annum. Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value. Interest paid would be tax deductible for the issuer.

The Face Value of a Bond is the stated value on the face of the bond and is also known as Par Value. It represents the amount of borrowing by the firm which it specifies to repay after a specific period of time i.e. at the time of maturity. For example, if the Face Value of the bond is Rs 100 and the bond is issued at 8% coupon rate, the Interest would be calculated on the Face Value of the bond. That is, annual interest would be Rs 100 x 8% = Rs 8 per annum. Generally, the bonds may be issued or traded at a Par (Face Value), at a premium or at a discount to Face Value.

Elementary valuation theories focus on dividends as the base for valuing equity shares. It represents the cash flow to the shareholders which is discounted to arrive at the value of shares. However, not all companies distribute dividends and we us other valuation methods to value shares of companies which do not distribute dividends. However, consider this. Dividend theories suggest that if the company believes that reinvesting dividends would lead to better shareholder wealth maximisation, dividends should not be distributed but should be reinvested instead. Accordingly, generally in emerging economies such as India, dividends have a much lower impact on valuation as companies prefer to reinvest the profits or distribute only a small part of the profits to shareholders. This leads to better capital appreciation for the investors and leads to higher valuation for the companies – particularly when the markets are ‘bullish’. Dividend Payout Policies are sensitive for the companies ...

Apple Inc (NASDAQ:AAPL) beat its own record in highest market capitalisation by crossing USD 700 billion markon November 25th, 2014. The shares of the company recently touched USD 118 taking its market capitalisation to a new record high of USD 701 billion. It is already the largest company in the world by market capitalisation. The second largest company Exxon Mobil Corp (XOM) now trails at a market capitalisation of USD 405 billion. The company's CEO Tim Cook has continued to focussed on innovation just like Steve Jobs and has steered the company towards new highs. This has resulted in a 12.4% increase in revenues to USD 182 billion (ttm). Higher valuation for the company is also justified through its high Profit Margin of over 21% and a Return on Equity of 33.6% [Source: Yahoo Finance, 25-Nov-14]. At the product level, the markets have cheered the larger screen iPhones and slimmer iPads launched in September and October respectively. Competing with Samsung, Apple is plann...

Valuation of Goodwill Goodwill has been valued by accountants since ages especially during mergers and acquisitions. Although practically speaking, Value of Goodwill is the difference between the Actual Price paid for the business less the book value of the business. However, there have been some defined approaches to valuation of business by accountants. Goodwill is defined as the super profit earning capacity of the business. A simplified approach to valuation of goodwill is as follows: Goodwill = Super Profit x Number of Years’ Purchase Super Profit = Future Maintainable Profit – Normal Profit Future Maintainable Profit: The buyer of business (or goodwill for that matter) is usually interested in what the business will be able to sustain as profits in future. Accordingly we adjust the historical profits to arrive at future maintainable profits. Take the historical profits for the last few years (e.g. 5 years). Identify if there is a clear trend in profits ...

Here is a Sample Valuation Information Request form that can be sent to the management of the company being valued. This is used for companies who have asked you to value their own company for internal purposes. This can also be used for due diligence by management consultants. COMPANY NAME: VALUATION DATE: If you have any questions, please call at . NOTE:   This is a generalized information request. If the questions are not relevant for you, please mark N/A or let us know where we can get more information. A. Financial Information Financial statements for financial years ending 5 years. Quarterly financial statements for last 8 quarters. Financial projections, if any, for the current year and the next three years. Include any prepared budgets and/or business plans. Central and State Corporate Income Tax Returns and supporting schedules for last 5 financial years. Details of all ESOPs, Pensions, Employee benefit trusts. Explanation of significant no...

There are basically two methods for computing the market values of the future cash flows of risky investment projects - Certainty Equivalent Approach and Risk Adjusted Discount Rate (RADR) method. The RADR method obtains the discount rates from widely used theories of risk and return such as Capital Asset Pricing Model (CAPM) and is thus impractical when Betas of comparison firms are difficult to estimate. In such cases where comparison firms do not exist and risk is required to be estimated, practical considerations suggest that Certainty Equivalent Method is a better valuation tool. The Present Value formula under Certainty Equivalent Method is given by: PV = SUM(Expected Future Cash Flows) - Beta (Risk of Tangency portfolio - Risk Free Rate)                                                          (1+ Risk Free Rate)

While evaluating differences between accounting line items for Accounting and Valuation purposes, we do come across some Expenses which are treated as Operating Expenses from an Accounting perspective though they are often treated as Capital Expenses for Valuation purposes. Research & Development Expense (R&D) Expense is a common example where it is treated as Operating Expenses under most Accounting Rules (some rules allow Development Expenses to be capitalised with a lot of conditions attached to them), but for valuation purposes they are treated as Capital Expenses because the benefits of R&D are usually derived over a longer period of time. But what about Advertisement Expenses? Companies usually spend a lot of money acquiring customers by spending huge amount of money on Advertisement. Consumer Goods companies such as Unilever, Procter & Gamble (P&G) and beverage companies such as Coke and PepsiCo are known to be heavy spenders on advertisement to get cus...

Investment decisions often rely on Cash flows rather than profits. While profits are the key measure of financial success from an accountant’s perspective, finance professionals (especially investment analysts) prefer evaluating investment decisions based on cash flows. One may wonder that while studying Accounting (which is the first step in understanding finance) we were first introduced the concept of Cash Basis of Accounting where all receipts and payments were recorded, then we were told that the right measure of evaluating business performance was through Accrual Accounting. However, we’re again talking about Cash Flows – which is a subset of or is similar to Cash Basis of Accounting. Well, let’s not get into that right now as Life is hard to understand. But the concept of Cash flows is not. Let’s understand how the cash flows and profits are related First, as we have discussed already, Profits are arrived at based on Accrual basis of accounting. Revenues are reco...

One of the various methods of valuing businesses, is the Income Capitalisation Method. Income Capitalisation Method assumes that the business will continue in operation even after it is sold. It projects the future income of the business based on historical performance adjusting for estimated changes. Historical financial statements and estimates are used for projecting the future financial statements. Capitalisation rate - The capitalisation rate is the rate of return required to take on operating the business – higher risk leads to higher capitalisation rate. Capitalisation rates are determined based in on the riskiness of the business as well as based on capitalisation rates of comparable companies. Comparable Capitalisation Rate can be calculated as Net income / Market Value. This would give us the capitalisation rate for comparable companies. Net Income / Earnings – The Net Income or the Earnings are used for calculating the Market Value of the company. It is ...

In the largest e-commerce deal in India so far, homegrown e-retailer and marketplace owner Flipkart has acquired online fashion retailer Myntra in an estimated Rs 2,000 crore deal.  Flipkart has been good at replicating established models and strategies. Flipkart founders - Bansals- were ex-Amazon employees and started Flipkart selling books online - just what Amazon did in its early days. Even in case of acquisition of Myntra, the strategy is the same as that of why Facebook acquired WhatsApp - kill competition. Fashion & Apparel has the largest potential in the e-commerce space and India is set to become the largest E-commerce market in the world - in terms of volume. As the urban (metro, Tier I and Tier II) population is getting more awareness and is getting exposed to E-commerce, India is slowly increasing its online spend. Apparel has been slow (it all began with books, to gift items to electronics - and now apparel) but has huge potential. Myntra has been a forerunner...

Generally speaking, value is often used to refer to the "price" at which the asset is sold in the market. However, particularly, in case of investment analysis, the price of the asset is different from its intrinsic value. Let's understand this in simple terms. If you've been walking in the desert without water for 2 days, you'd be dying of thirst. In such situation, a glass of water would be invaluable for you. Although the price of a water bottle is Rs 20, you could be willing to pay even Rs 100 for this bottle. So for you, while the price is Rs 20 but its value could be as high as Rs 100. The Investment characteristics of the asset are major determinants of value. The Intrinsic Value of any asset is the value of the asset assuming that the valuer (analyst or investor) has complete understanding of the asset's investment characteristics. For any investor, the intrinsic value reflects his true value of the asset.

Facebook's recent announcement of the USD 19 billion acquisition of WhatsApp has stirred the social network and finance fraternity. Surprisingly, many financial analysts have been justifying the valuation calling it Facebook's (more specifically, Mark Zuckerberg's) move towards achieving the objective of "connecting the world". Here's a quick peek at how the valuation plays out. WhatsApp's model WhatsApp has been a huge success in terms of user engagement and its its average 450 million active users are usually very active on the application sending millions of text messages and photos (even videos). Recently, WhatsApp also added the voice messaging system on its application. From Revenue perspective, WhatsApp is free for 1st year of service and then charges $1 per annum. However, the system can be bypassed easily and there are millions of users who have never paid despite using the application for years. This is a major snag in WhatsApp's re...

Setting off of unabsorbed losses and unabsorbed depreciation during Amalgamation The setting off of unabsorbed losses and unabsorbed depreciation of the amalgamating company by the amalgamated company is allowed only in limited cases as envisaged in Sec 72(A) of Income Tax Act in order to encourage revival of sick units. The setting off, however, is allowed only if the following conditions are fulfilled: a) the amalgamated company was not a financially viable company immediately before amalgamation b) the amalgamation was in the public interest c) such other conditions as the central government may specify by notification in the official gazette to ensure that benefits under this section is available only to facilitate rehabilitation or revival of the business of the amalgamating company Carry forward of unabsorbed depreciation is allowed only if: a) during the previous year relevant to the assessment year, the business of the amalgamating company was carrie...

The Black and Scholes Model : The Black and Scholes Option Pricing Model didn't appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Black and Scholes can't take all credit for their work, in fact their model is actually an improved version of a previous model developed by A. James Boness in his Ph.D. dissertation at the University of Chicago. Black and Scholes' improvements on the Boness model come in the form of a proof that the risk-free interest rate is the correct discount factor, and with the absence of assumptions regarding investor's risk preferences. The M...

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. ...