Introduction

to Financial
Markets and
Enterprise
Valuations

Ananay Thakur
(Finance; Dream Merchants club)
Disclaimer

This presentation is for educational and

informational purposes only. It does not
constitute financial, investment, or
trading advice. The content presented
does not recommend or endorse any
specific stocks, securities, or investment
strategies. All financial markets involve
risk, and past performance is not
indicative of future results. Before
making any investment decisions, please
consult a licensed financial advisor.
Need for
investing
What is an asset class?

• Group of securities with similar characteristics

• i.e their price tend to move together
Comparing different asset classes
 Different reasons and
perspectives

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

inflation rates, investing in assets like strategies help preserve and grow
stocks and real estate helps maintain capital, reducing risk and enhancing
purchasing power. returns.
• Financial Goals : Investing aids in • Tax Advantages : PPF, National
achieving key goals like buying property, Savings Certificates (NSC), and Equity-
funding education, or starting a business. Linked Savings Schemes (ELSS) offer
• Retirement Planning : Provident Fund tax benefits.
(EPF) and Public Provident Fund (PPF) is • Passive Income : stocks, bonds, and
vital for securing a comfortable real estate generate additional income
retirement. through dividends, interest, and rent.
Financial
Regulators – They don’t just observe

• 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
 Financial Intermediaries
• Banks • Brokerage Firms

Role: Provide banking services including deposits, Role: Act as intermediaries between investors and securities
loans, and payment services. markets.
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 • Credit Rating Agencies
Stock 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
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
Initial Public Offering

An Initial Public For a company to list These further discussed items

Offering (IPO) is the itself on the markets they may be useful in beginning to
process by which a private hire investment banks to invest in the markets
company offers its shares proceed calculation fair carefully.
to the public for the first valuation using different
time to raise capital. After methods that we will see
an IPO, the company's in the following slides.
shares are traded on a
stock exchange.
Advantages and Disadvantages

Advantages of an IPO:
Raises capital for business expansion.
Enhances brand visibility and credibility.
Provides an exit route for early investors or venture capitalists.

Disadvantages of an IPO:
Expensive process due to legal and underwriting costs.
Increased regulatory and public scrutiny.
Ownership dilution, leading to loss of control by founders.
IPO Pricing Methods & Valuation

Issuer and underwriters set a

predetermined price.
Fixed Price Method: Example: TCS IPO (2004) was priced
at ₹850 per share.

Investors bid within a price band (e.g., ₹100-120).

Book Building Process Final price determined based on demand-supply
dynamics.
(Most Common Today): Example: Zomato IPO (2021) was offered at ₹72-
76 and oversubscribed 38 times.
Investors submit bids, highest bidders
get allocations at the lowest
accepted price.
Dutch Auction IPOs: Example: Google IPO (2004) used
Dutch Auction, pricing at $85 per
share.
IPO Underwriting & Market
Stabilization

Underwriters (Investment Banks) like

Goldman Sachs, Morgan Stanley manage
IPOs by guaranteeing subscription for
undersubscribed IPOs.

Greenshoe Option:
• If IPO is oversubscribed, additional shares
(usually 15% more) can be issued.
• Example: LIC IPO (2022) used a greenshoe
option to stabilize stock price post-listing.
 IPO Listing and Post-IPO Performance

• Listing Day Performance:

• Oversubscribed IPOs often see a price jump on listing day (e.g., Nykaa
IPO surged 80% on Day 1).
• Undersubscribed IPOs may list below issue price (e.g., Paytm IPO
dropped 27% on listing).
• Lock-in Period for Promoters & Pre-IPO Investors:
• Usually, 6-12 months to prevent dumping shares immediately after
listing.

*For allotment of an IPO, use different PAN based demat accounts so that the probability of
getting it increases as it is done on a lottery based system if the IPO is oversubscribed.
IPO Investment Strategies
REFORMS IN IPO
INFRASTRUCTURE
• 1992 – SEBI Committee on Disclosure and • 2005 – M. Damodaran Committee (Investor
Investor Protection (DIP) Introduced mandatory Protection)Strengthened IPO listing norms,
disclosure norms for IPOs to protect retail investors. reducing time-to-list from 22 days to 7 days. Led
Set guidelines for book-building processes and to ASBA (Application Supported by Blocked
pricing mechanisms in public offerings. Amount) introduction in 2008.
• 1995 – Malegam Committee on Corporate • 2010 – Prashant Saran Committee (SME
Governance Proposed disclosure and governance IPOs)Recommended the creation of separate
standards for publicly listed companies. Led to stock exchanges for SMEs. Led to the launch of
stronger IPO transparency rules and better investor
BSE SME & NSE Emerge platforms for small
protection.
businesses.
• 2001 – K.B. Chandrasekhar Committee (Book-
Building Reforms)Recommended book-building • 2017 – Uday Kotak Committee on Corporate
IPOs over fixed-price issues for better price discovery. Governance Recommended stricter governance
Led to SEBI’s implementation of mandatory book- norms for IPO-bound companies. Strengthened
building for large IPOs. disclosures on promoter holdings and related-
party transactions.
*SME : Small and Medium Enterprises • 2020 – G. Mahalingam Committee (T+1
Settlement)Suggested reducing IPO settlement
cycles to increase market liquidity.Led to T+1 IPO
settlements, allowing shares to be credited within
The RHP* contains details about:

• Opening and closing date of the

offering
• Company and Industry Overview
• The offer details (Issue size, fresh
and OFS size details, pre and post-
share capital, Investor allocation and
more information)
• Record of the share capital held by
the promoters of the company
• Subscribed, issued and paid-up
capital before the IPORHP is an
updated version of DRHP.
• The latest financial statements and
updated offer details and dates are
mentioned in RHP
• Record of the share capital held
bythe promoters of the company

*Red Herring Prospectus

 Sample IPO analysis –

• Company Snapshot: • IPO Details:

• Type: Offer for Sale (OFS) - This means existing shareholders are selling their
• Company Name: Hexaware Technologies
shares, and the company will not receive fresh capital.
Limited
• Total Offer Size: Up to ₹87,500 crore
• Industry: IT & Business Process Services
• Face Value per Share: ₹1 - The nominal value assigned to each share by the
• Founded in 1992 (Originally as Aptech company.

Information Systems Ltd.) • Listing Exchanges: NSE & BSE - National Stock Exchange and Bombay Stock
Exchange where the shares will be traded.
• Headquarters: Navi Mumbai, India
• Book Running Lead Managers: Kotak Mahindra Capital, Citigroup, J.P. Morgan,
• Promoter: CA Magnum Holdings (backed by HSBC, IIFL Capital - Investment banks managing the IPO process.

Carlyle Group) • Offer Opens: February 12, 2025

• Business Model: Provides IT consulting, • Offer Closes: February 14, 2025

digital transformation, and business process • Price Band: ₹674 - ₹708 per share - The range within which investors can bid for
services across banking, healthcare, and shares.

manufacturing sectors. • Risk Factors:

• Lack of formal market since voluntary delisting in 2020
• Market Position: Competing with major IT
• Intense competition in IT services
 Fundamental & Technical Analysis

Fundamental Analysis:
• Revenue Growth: CAGR (Compound Annual Growth Technical Indicators for Listing:
Rate) of 12.5% over the past 3 years, reaching ₹9,200 • Market Sentiment: Positive due to digital transformation growth and recent strong performance
crore in 2024 - Measures the company's average annual of IT stocks - Investor perception regarding the sector.
revenue growth. • Comparative Valuation: Expected to trade in line with mid-cap IT services firms, with initial
• Profit Margins: EBITDA (Earnings Before Interest, Taxes, volatility based on market response - Compares the IPO price to industry peers.

Depreciation, and Amortization) margin of 20.4%, net • IPO Subscription Trends (As of Feb 12, 2025, 6:00 PM):
profit of ₹1,875 crore in 2024 - Indicates profitability • Qualified Institutional Buyers (QIBs): 0.04x subscribed - Indicates low initial institutional
before certain expenses. interest.
• Non-Institutional Investors (NIIs): 0.01x subscribed - Very low demand from HNIs.
• Debt Levels: Total debt of ₹1,050 crore, Debt-to-Equity
• Retail Individual Investors (RIIs): 0.04x subscribed - Moderate interest from retail investors.
ratio at 0.25 - indicating the proportion of debt compared
• Employees: 0.11x subscribed - Highest interest among all categories.
to equity.
• Total Subscription: 0.03x - Very low overall demand so far.
• Cash Flow: Strong cash conversion ratio (~85%), • Grey Market Premium (GMP): Early indications suggest weak demand, with no significant
₹1,590 crore net operating cash flow in 2024 - Reflects premium reported - Reflecting subdued interest in pre-market trading.
the company's ability to convert revenue into cash.
• Volume and Liquidity:
• Client Base: 400+ clients, top 10 clients contribute 35% • Current low subscription figures suggest weak initial listing volumes.
of revenue - Highlights customer diversification. • A strong pick-up on the last bidding day is necessary to improve listing outlook.

• • If demand remains low, the stock may list near or below the issue price.
Valuation: Expected P/E (Price-to-Earnings) ratio of 28x
based on FY24 earnings - Compares the stock price to • Potential Listing Price Range: ₹674 - ₹708 per share, depending on final book-building demand
the company's earnings. - The expected price range when the stock begins trading.
VERDICT

Bullish Case: Strong fundamentals,

digital expansion, robust client base -
Favorable factors that could drive stock
price up.

Bearish Case: Weak subscription

demand, intense competition, global IT
spending uncertainty - Risks that could
affect stock performance.

Investor Type Recommendation:

Suitable for long-term investors seeking
IT sector exposure, if subscription
demand improves. Should you consider
investing?
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
• NPV = 100 -
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

horizon of N years = N

• Market value of equity = Assets + Discounted present cash

flow - Debts
DCF Method –
Part II

• Enterprise value = Vo
• Vo =
• Po is the price of one share
• Po =
• 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
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 -
Market is all
about matching
the expectations
Types of Fixed Income Markets

• Government Bonds
• Corporate Bonds
• Debt based securities
• Money Markets - Treasury bills (T-bills), commercial paper,
certificates of deposit (CDs), and repurchase agreements
(repos)
Money Markets

• Market Structure & Participants

• Central Banks (RBI, Federal Reserve) regulate and intervene through
monetary policy tools (Repo, Reverse Repo).
• Commercial Banks use the market for interbank lending (Call/Notice
Money).
• Corporations & Financial Institutions issue Commercial Papers
and Certificates of Deposit.
• Mutual Funds & Hedge Funds invest in short-term instruments for
liquidity management.
Money Market Instruments
Trading & Yield Calculation Discount
Yield Formula (for T-Bills & CPs):

Trading & Yield Calculation Discount Yield Formula (for T-Bills & CPs):

• 𝑌𝑖𝑒𝑙𝑑=(𝐹𝑎𝑐𝑒𝑉𝑎𝑙𝑢𝑒−𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑃𝑟𝑖𝑐𝑒𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑃𝑟𝑖𝑐𝑒)×365/𝐷𝑎𝑦𝑠𝑡𝑜𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦×100

• Repo Rate Calculation:

• 𝑅𝑒𝑝𝑜𝑅𝑎𝑡𝑒=(𝑅𝑒𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑃𝑟𝑖𝑐𝑒−𝐼𝑛𝑖𝑡𝑖𝑎𝑙𝑃𝑟𝑖𝑐𝑒𝐼𝑛𝑖𝑡𝑖𝑎𝑙𝑃𝑟𝑖𝑐𝑒)×360𝐷𝑎𝑦𝑠𝑡𝑜𝑀𝑎𝑡𝑢𝑟𝑖𝑡𝑦 ×100
• Example :
• A 91-day T-Bill with a face value of ₹100 is bought at ₹98.
• Yield = (100-98)/98 × (365/91) × 100 = 8.26% annualised.
• This yield helps determine risk-free interest rates for financial models.
Practical Applications in Financial
Markets

• Liquidity Management: RBI conducts repo operations to

inject or absorb liquidity in banking systems.
• Arbitrage in Money Markets: Traders exploit differences in
CD vs CP yields for short-term gains.
• Corporate Treasury Operations: Companies use CPs to
reduce reliance on bank credit.
• Hedge Fund Strategies: Using repos to leverage positions
and maximize returns.
Investing in Bond Markets

Lower initial yield,

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

Benchmarking –
Tip – buy bonds comparing an asset
Keywords = duration
during a class to an index to
Credit risk , maturity , coupon ,
macroeconomic asses its
principal
slowdown performance, 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.

• Bond price =
• 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
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

• 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.