Introduction

to Financial
Markets and
Enterprise
Valuations
- Ananay Thakur
Need for
investing
Comparing
different asset
classes
 Different reasons and perspectives

• Inflation Protection : With India’s inflation • Capital Growth : Diverse investment

rates, investing in assets like stocks and strategies help preserve and grow capital,
real estate helps maintain purchasing reducing risk and enhancing returns.
power. • Tax Advantages : PPF, National Savings
• Financial Goals : Investing aids in achieving Certificates (NSC), and Equity-Linked
key goals like buying property, funding Savings Schemes (ELSS) offer tax
education, or starting a business. benefits.
• Retirement Planning : Provident Fund • Passive Income : stocks, bonds, and real
(EPF) and Public Provident Fund (PPF) is estate generate additional income
vital for securing a comfortable retirement. through dividends, interest, and rent.
Financial Regulators
• Reserve Bank of India (RBI)

Role: The central bank of India, responsible for regulating the

monetary policy, managing currency, overseeing the banking
sector, and ensuring financial stability.

Functions: Controls inflation, manages foreign exchange,

supervises financial institutions, and acts as the lender of last
resort.

• Securities and Exchange Board of India (SEBI)

Role: Regulates the securities markets to protect investors

and ensure market integrity.

Functions: Oversees stock exchanges, regulates market

intermediaries, and enforces securities laws.

• Ministry of Corporate Affairs (MCA)

Role: Administers corporate affairs in India.

Functions: Oversees company law, regulates corporate

governance, and monitors corporate financial reporting.
 Financial Intermediaries
• Banks • Brokerage Firms

Role: Provide banking services including deposits, loans, and Role: Act as intermediaries between investors and securities
markets.
payment services.
Services: Facilitate buying and selling of securities, provide
Types: Public sector banks, private sector banks, investment advice.
cooperative banks, and regional rural banks.
• Pension Fund Managers
• Stock Exchanges
Role: Manage pension funds and schemes.
Role: Facilitate the trading of stocks, bonds, and other Examples: National Pension System (NPS) fund managers like
securities. SBI Pension Funds, LIC Pension Fund.
Examples: Bombay Stock Exchange (BSE), National Stock • Credit Rating Agencies
Exchange (NSE).
Role: Assess the creditworthiness of issuers of debt securities.
• Mutual Fund Companies Examples: CRISIL, ICRA, CARE Ratings.
Role: Pool funds from investors to invest in securities. • Asset Management Companies (AMCs)
Examples: HDFC Mutual Fund, SBI Mutual Fund, ICICI Role: Manage investment funds and portfolios.
Prudential Mutual Examples: HDFC Asset Management, SBI Funds Management.
Risk
Types of risks associated while investing

1. Country risk
2. Market risk
3. Currency risk
4. Liquidity risk
5. Inflation risk
6. Shortfall risk
VALUATION RATIOS

Price to Price to Price to

earnings sales book

Enterprise
Price to Dividend
value to
cash flow ratio
EBITDA
When using valuation multiple to evaluate an enterprise we should consider the
growth and developmental rate along with industry they operate to make the
comparison fair.
Price to Earnings (P/E)

• The amount a common stock investor pays for a single dollar of

earnings.
• It doesn’t incorporate the balance sheet. P/E ratios don’t consider
debt.
• If the ratio is low, it denotes the stock price is lower for the earnings,
and hence, the company and its stocks are undervalued and vice-
versa.
Price to Sales (P/S)

• Disregards profitability and leverage.

• The price-to-sales valuation ratio is often used as a comparative
price metric for companies that don’t have positive net income -
often young companies or those in trouble.
• Relatively stable metric. Revenue is (generally) more stable than
something like earnings, which can be more volatile.
Price to Book (P/B)

• Book value is a company’s value if it liquidated its assets and paid

back all its liabilities.
• A ratio >1 means that the market thinks that future profitability will be
greater than the required rate of return, assuming that book value
reflects the fair values of the asset.
• Can’t compare tech firms or service providers with firms having
tangible liquifiable assets or inventory.
EBITDA
• Earnings before interest, taxes, depreciation, and
amortization (EBITDA)
• Amortization is the accounting practice of spreading the
cost of an intangible asset over its useful life. Intangible
assets are not physical, but they are still assets of value.
Examples of intangible assets that are expensed through
amortization include patents, trademarks, franchise
agreements, copyrights, costs of issuing bonds to raise
capital, and organizational costs.
• Depreciation is the expensing of a fixed asset over its
useful life. Fixed assets are tangible objects acquired by a
business. Some examples of fixed or tangible assets that
are commonly depreciated include buildings, equipment,
office furniture, vehicles, and machinery.
EV to EBITDA

Enterprise value (EV) is market capitalization + preferred

shares + minority interest + debt - total cash.

The ratio tells you how many multiples of EBITDA someone

needs to pay to acquire a business.

Preferred stock owners have priority dividend payouts with

limited or no voting rights and a higher preference while
liquidations of assets.
Price to Cash Flow

Measures how much cash a company is generating relative to its market value.

Particularly useful for stocks that have positive cash flow but are not profitable.

Tedious to calculate the future cash flows due to different methods and accounting rules.

A company with a share price of Rs.20 and cash flow per share of Rs.5 equates to a P/CF of Rs.4
(Rs.20/5). In other words, investors currently pay Rs.4 for every future dollar of expected cash
flow.
Dividend ratio
• The dividend ratio focuses explicitly on the
dividend earned on every share bought by
the shareholders. It assesses what
shareholders receive as dividends to what
the company’s net income is. If this ratio is
above 100, it indicates the company is paying
its shareholders more than its net income.
Summary of Multiples
NPV Calculation

• NPV – net present value = PV(benefits) –

PV(costs)
• Let’s say that the cash flow on the 0th month is
100 and the future cash flows are -90 , 20 , -90
, 40. We then discount these cash flows so that
these represent the current value.
• Let’s set the discount rate at 10%, then the
NPV of this enterprise is
90 20 90 40
• NPV = 100 - + 2 − +
1.1 1.1 1.13 1.14
DCF Method – Part I

• We assume the cash flows beyond the explicit

forecast horizon will continue to grow at a constant
rate of Gfcf .

• FCF is the free cash flow

• Rwacc weighted average cost of capital

• Vn is the terminal value at the end of forecast

1 + G𝐹𝐶𝐹
horizon of N years = ∗ 𝐹𝐶𝐹 N
Rwacc +G𝐹𝐶𝐹

• Market value of equity = Assets + Discounted present

cash flow - Debts
DCF Method – Part II

• Enterprise value = Vo
𝐹𝐶𝐹1 𝐹𝐶𝐹2 𝐹𝐶𝐹𝑁+𝑉𝑛
• Vo = + + ⋯+
1+𝑅 1+𝑅 2 1+𝑅 𝑁

• Po is the price of one share

𝑉𝑜−𝐷𝑒𝑏𝑡
• Po =
𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

• Po is the correct value of a share if all the

assumption like wacc and cash flow
prediction, discount rate are correct.
Other popular
valuation methods

• Leveraged Buyout
• Comparable Company
Analysis
• Comparable Transaction
Comp
• Asset-Based
• Sum of Parts Valuation
Method
Hedge Funds

• Generate positive returns with no regards to the market conditions

• Use short selling and leverage
• Freedom to not be fully invested in an asset class like mutual fund.
• 2% management, 20% performance
• Eat your cooking; fund managers are expected to have invested a
large chunk of their portfolio in their own fund, so that investors have
trust that the manager won’t do anything silly with their money.
Short selling

• Borrowing stocks to sell them at a higher price without actually having to

own that stock.
• Going wrong while short causes more harm than going wrong while long.
As the weightage of the stock increases in the portfolio.
• Eg: 1000rs portfolio
• Case I : 100rs short and price goes up to 120rs then the
• Weightage changes from 10% to 12%
• Case II : 100rs long and price falls to 80rs then the
• Weightage changes from 10% to 8%
Leverage

• Money borrowed either borrowed from an investment bank or a

broker to trade the stocks you find in your favour with a higher
amount to increase profits.
• If the leverage is 5X then we have X of our own and 4X is borrowed
• If you get profit of 10% of X then the total profit is 50% of X
• If you lose 10% of X then the total loss is 50% of X, exclusive of the
borrowing charges.
Fixed Income
Securities -
Bonds
Market is all about
matching the expectations
Investing in Bond Markets

Lower initial yield,

Limitations of Govt. and corporate Fundamentals of
comparatively lesser
benchmarking bonds borrower
returns

Benchmarking –
Tip – buy bonds during comparing an asset Keywords = duration ,
Credit risk a macroeconomic class to an index to maturity , coupon ,
slowdown asses its performance, principal
e.g. S&P 500.
Government
bonds - I

Features :

1. Low risk
2. Govt. backed
3. Has economical risk,
4. Interest risk,
5. Political risk, in addition to
the general risks of the
markets.
Government
bonds - II

• Duration – equilibrium point of all

present values of cash flows (coupons
and principals).
• Yield to maturity (YTM) – rate of return
you get if you hold the bond till
maturity and all cash flows are paid as
agreed.
1
• 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑎 𝑏𝑜𝑛𝑑 ∝ 𝑦𝑖𝑒𝑙𝑑
𝑐𝑜𝑢𝑝𝑜𝑛 𝑝𝑟𝑖𝑛𝑐𝑖𝑝𝑎𝑙
• Bond price = σ𝑁
𝑡=1[ 1+𝑌𝑇𝑀 𝑡
+ 1+𝑌𝑇𝑀 𝑁
]
• A coupon or coupon payment is the
annual interest rate paid on a bond,
expressed as a percentage of the face
value and paid from issue date until
maturity.
Duration Vs Maturity
• A bond's maturity is the length of time until the principal must be paid back. So, a 10-year bond
will earn interest for 10 years from the date it is purchased. At the end of that time period the
bond's principal is repaid to the owner of the bond and interest payments cease.
• Duration means nothing else than that after the given amount of years, you will have your
capital investment back as nominal amount.
Change in Bond Price

∆𝑟
• −𝐷 ∗ 100
1+𝑟
• Here D is the duration, r is the interest rate, ∆r is the change in interest
rates.
• The above identity show how the price of a bond may change due to
change in its interest rates or yield.
• Here it is evident that if the change in interest rate is negative i.e. the new
yield is lower the bond price will go up and vice versa. This is the
mathematical reason for change in the bond price.
Points to search

• Hedge Funds, Investment Banks, Bulge Bracket Firms, Private Equity Firms
• Learning resources – Investopedia, Zerodha Varsity,
• Financial events of the past like 2008 Lehman Brothers Crisis, Harshad Mehta Scam and
think why and how these events affected the financial markets
• Why did the market went up when RBI gave the GOI a huge sum?
• How does the RBI controls inflation via different instruments like repo rate, CRR, etc?

Link to reading resources

https://www.investopedia.com/financial-term-dictionary-4769738
https://drive.google.com/drive/folders/1CVrPzOytV0y_tHVU-x1LfOZ-
AcQy6RXz?usp=sharing
The End
Thank you for your patience and
perseverance.