POPULAR METHOD Less Time and Resource Intens nsive as Compared to - - PowerPoint PPT Presentation

POPULAR METHOD

• Less Time and Resource Intens
• Easy to Understand and Comm
• Can be Defended Easily
• Reflects the Current Market M

nsive as Compared to DCF. municate to Clients. Mood.

PITFALLS

• Inconsistent estimates of value w

(risk,growth and cash flow potential

• Values move with market mood
• Lack of transparency in Underl
• Vulnerable to manipulation and

where key variables ial) are ignored

• ds

rlying Assumptions nd biases

ASIC STEPS USING MULTIPLES Define consistently and clearly ( Example:- Logical choice of numerator and denominat quity Value) Uniform application across firms. (Example: Uniform application across firms. (Example: Rules /Closing Year) Description Tests

• Outliers and Averages
• Biases due to elimination

Different variations of P.E Ratio) inator( Example :-Equity Value with ple:- Different Accounting Standards ple:- Different Accounting Standards

nalytical Tests hat are the fundamentals that affect t

• w will the multiple react to changes

eterminants of the multiples arethe sa cash flow potential ct the multiple es in these fundamentals same as before – risk, growth and

lative Valuations vis-à-vis DCF CF assumes markets may be wrong – elative Valuation assumes markets are wrong at firm level wrong at firm level hus, you could find a stock overvalue relative basis if the sector is overvalu – at overall level and at firm level are right are overall level and could ued on DCF basis, but undervalued lued

ICE EARNING RATIO (P.E RATIO) P.E = Market Price Per Share/ Earning Most Widely Used Tool due to Easy A Logically Defined – both relate to an In Common Parlance Low P.E = Unde

• P. E – Tool to Estimate Simple Payba

O) ing per Share Availability and Understanding n Equity Share dervaluation and Vice Versa back Period

LOGICAL STEPS IN DERIVING P Adjusting for Diluted Earnings w.r.t E Judging the probabilities of Future C Removing The effect of Extraordinary Using Similar Earnings for Comparis Current, Basic or Diluted P.E t ESOPS Conversions. ary Adjustments/One Offs. rison – like Trailing, Forward,

SOME EXAMPLES /CASE STUD LOSS MAKING COMPANIES/ Loss is due to one off Factors OR du Taking Average of last 5 years OR th Taking Average of last 5 years OR th Also using other ratios to come to a Above Steps to enable a Measured D UDIES IN P.E ADJUSTMENT / CYCLICAL COMPANIES due to Cyclical Nature of the Busines the Entire Cycle. the Entire Cycle. a logical conclusion Decision

K CEMENT A Domestic Cyclical Company) YEAR EPS 2014 13.4 2013 32.3 2012 24.5 2011 8.8 2010 31.3 VERAGE EPS 22.06 SANGH ( A Dom AVERA VERAGE EPS 22.06 RICE 640 ATEST P.E 47.8 .E BASED ON AVERAGE EPS 29.0 ECTOR P.E 32.0

URCE:- CAPITALINE

AVERA PRICE LATEST P.E BAS SECTOR

SOURCE:

HVI MOVERS

• mestic Cyclical Company)

YEAR EPS 2014

• 3.4

2013 9.3 2012 23 2011 19.5 2010 20.4 AGE EPS 13.8 AGE EPS 13.8 180 ST P.E N.A ASED ON AVERAGE EPS 13.1 OR P.E 26.0

E:- CAPITALINE

BANKING AND FINANCIAL Unique Nature of Business makes As all Assets are priced at Current More Detailed Discussion at time o L COMPANIES s at times using P.E misleading nt Value, P/BV a more apt measure e of P/BV discussion.

COMPANIES WITH HIGH FINANCIAL arnings depressed due to high leverage . .E ratio is at elevated levels igh Financial Leverage may be due to Faulty igh Financial Leverage correction may happ V/EBIDTA is a better tool in such a scenario L LEVERAGE lty Capital Structure or Prevailing High Intere ppen via New equity issuance or Debt Refina io

DCF Perspective with regards to PE

• PE Multiples derivation from DCF Formul
• PE Multiple is positively impacted by grow

stable period)

• PE Multiple is negatively impacted by ris
• PE Multiple is positively impacted by retur

mulae by growth (both in high growth period and by risk eturn on equity

E Multiples across time

Comparison of current multiples with history is very However, if underlying fundamentals have changed, An increase in interest rates should result in higher c A greater propensity to take risks will result in a low equity and increase PE multiples An increase in expected growth rates will increase P An increase in return on equity will increase PE mul ery common ed, such historical comparison may not be valid r cost of equity and a lower PE multiple wer risk premium expectation and thus lower cost PE multiples ultiples

Multiples across countries

• untries with higher real interest rates
• untries with higher expected real gro
• untries which are viewed to be high r

miums would carry lower PE Multiple

• untries which are more efficient and

her PE Multiples es would have lower PE Multiples rowth rates will have higher PE Multi h risk and would hence require higher ples. d hence earn higher ROE will have

EG Ratio PEG Ratio = PE Multiple / Expected G If Growth is on current year’s earning If Growth is based on trailing earnings Forward PE is never used as it will res d Growth Rate ngs, PE should be Current PE gs, PE should be Trailing PE result in double counting

terprise Value to EBIDTA One of the Most Theoratically strong multipl irm level multiple ewer firms with negative EBIDTA as compa t in aggregation epreciation policy differences impact on EP

• mparable across companies with different

Only Core Operating Earnings are concerne Widely used in Mergers and Acquisitions tiple. pared to negative EPS – hence, fewer firm

• n EPS eliminated in EBIDTA

nt leverage levels ned

/ EBIDTA / EBIDTA = (Market Value of Equity +MV of Deb ash netted out of numerator terest Income netted out of EBIDTA ifficulties in case of investments in subsidiaries and ets ) are not fully recognized Book Value of Debt is normally taken ( as in India w ebt – Cash) / EBIDTA d joint ventures as incomes a we don’t have a thriving Bond Market)

R Market Price EPS P.E RATIO NET DEBT M 31.6

• 10.9
• 30853

134.3 5.4 25.1 26365 211.8 28.6 7.4 21401 234.1 44.5 5.3 28910 228.6 32.2 7.1 32601 342.0 45.9 7.5 30931 TATA MOTORS ( C 342.0 45.9 7.5 30931

rce:- Capitaline

(IN CRORES) (IN CRORES) (IN CRORES) MARKET CAP EV EBIDTA EV/ 8110 38963 2548 38267 64632 9875 67149 88550 17478 74208 103118 22141 72930 105531 24809 109106 140037 34681 ( CONSOLIDATED) 109106 140037 34681

Multiple Perspectives irms with lower tax rates should comm igher depreciation and amortisation l igher reinvestment requirements shou irms with lower cost of capital should irms with higher expected growth sho mmand higher multiples levels should result in lower multiple

• uld depress the multiple

ld enjoy higher multiples hould enjoy higher multiples

ice to Book (Adjustments)

• ok Value however affected by accounting
• mparisons across countries may be difficul
• me firms especially tech may have low book va

djustments for acquisition accounting may be Technological changes may make Assets re Good Will needs to be looked at in Detail. ng policies icult book values and hence very high ratios ay be difficult and complex redundant . (ex Camera Film Roll, Pagers)

• l. (Case Study)

TATA STEEL BOOK VALUE 2009 305 2010 257 2011 369 2012 439 2013 351 (Im 2014 417 2014 417 RUS ACQUISITION ODWILL IMPAIRMENT CHARGE pical Time Lag between Error and Admission seem urce :- pitaline (Impairment Charge of Rs. 88 Per share) 200 201 ems to be about 5 years ( Source : ECONOMIST)

PBV Perspectives

• PBV increases with higher ROE
• PBV increases with a higher payou
• PBV decreases with a higher Cost o
• PBV increases as growth rate incre
• ut ratio

st of Equity reases

Applications – [part 1]

• me investors use PBV as a screen to pick unde

hers combine this with other fundamentals t gh ROE combined with Low PBV is taken a igh Usage in Valuing Banks and Financial S alance Sheet. ma and French concluded that firms in the L nst High PBV firms earning 0.30% during 1963 t k undervalued stocks s to pick undervalued stocks n as a proxy for low risk l Stocks as no Historical Bias in their e Low PBV class earned 1.83% per month ng 1963 to 1990

V Applications – [part – 2] enjamin Graham uses price to be less terion since 1934 amodaran tested low PBV portfolios amodaran tested low PBV portfolios rned 25.6% annually against S&P earn he reverse portfolio (high PBV and lo riod ss than 2/3rd of book value as a s (with high ROE) and found they s (with high ROE) and found they arning 17.49% during 1982-1991 low ROE) earned 10.61% in this

ICICI BANK A PRICE 350 BV AS ON MARCH 14 127 P/BV 2.8 ROE 14% P.E 21

Source :- Capitaline

AXIS BANK HDFC BANK YES BANK 490 950 740 163 181 197 3.0 5.2 3.8 17% 21% 25% 19 28 17

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venue Multiples evenues cannot be negative unlike EPS or E evenues are not so much influenced by account evenues are less volatile than EPS or EBIDT isadvantage – it can lull you into investing i Recent Investments in Firms Like Flipkart, Multiples Used by Venture Capital Firms.

• r EBIDTA

counting policies as EPS or EBIDTA DTA ng into high revenue low profit firms , Snapdeal are done on these

• mparison OF Shares with Differential Voting R

ATA MOTORS ATA MOTORS DVR Carries 1/10 Right of Normal Share) Entitled to 5% Higher Dividend)

• urce :- Capitaline

Is Such a Big Dis

g Rights PRICE P. 480 11 330 (A discount of 31%) 7.

iscount Justified?

res Issued at a discount of 10% By Comp rnationally Shares with Differential Votin OGLE C SHARE rries No voting Right) OGLE A SHARE rries 1 Vote for Every 1 Shares) OGLE B SHARE ( Held by Promoters) rries 10 Vote for Every 1 Shares) pany in 2008 ting Rights Trade at 5-10 % Discount $528 ( Discount of less than $537

e derive financial ratios from the financial statements. W support a value investment analysis, investing is not a pain epticism and judgement are always required. For one thin tured in a Company’s financial statement – for example In eivables uncollectible, liabilities are sometimes unrecorde erstated.

Valuation is an Art with Sk

condly Valuation is an art, not a science. As the value of a iables, it can be typically assessed only in a range. ird, the outcomes of all investments depend to some exte dicted with certainty; for this reason, even some carefully fitable outcomes. Sometimes a stock may become cheap f del, hidden liabilities, protracted litigation or incompetent While these ratios do help an investor aint by numbers exercise. thing, not all factors affecting value are le Inventories can become obsolete, rded and asset values over or

kepticism

• f a business depends on numerous

extent on the future, which cannot be ully analysed investments fail to achieve ap for good reason like a failed business tent or corrupt management.

• Investment must always be practiced with caution an

additional information while realizing that you will nev

• In the end, the most successful investors combine det

with endless discipline and patience, intellectual hones and investment experience. and humility, and with a relentless search for never know everything about a company. detailed business research and valuation work

• nesty, sensitivity analysis and years of analytical

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