Corporate Valuations: Techniques and Application

A compilation of research
oriented valuation articles
JULY 2013
Corporate Valuations
“Techniques & Application”

Contents
Business valuation 2
Relative valuation 6
Sum of the parts valuation and value creation 10
ESOP valuation 13
Discounted Cash Flow valuation 16
Enterprise valuation 21
Valuation discount applicable to holding companies 24
Valuation in information technology sector 27
RBI valuation 31
Regulatory valuations 36
About Corporate Professionals 40
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© 2013 Corporate Professionals

1
PREFACE
Knowing what business is worth and what determines its value is prerequisite for intelligent decision making. John Maynard Keynes said, "There is
nothing so dangerous as the pursuit of a rational investment policy in an irrational world.” Valuation is the process of determining the “economic
worth” of an asset or company under certain assumptions and limiting conditions and subject to the data available on the valuation date. Most
treatises and court decisions encourage valuers to consider more than one method which must be reconciled with each other to arrive at value
conclusion.
However, as of now there is not much guidance on standards for business valuation in India specifically for unlisted and private companies,
numerous conceptual controversies still remain, even among the most prominent valuation practitioners. www.corporatevaluations.in by virtue of its
extensive promoters capital markets experience, dedicated valuation team, in-house research wing and proven expertise in corporate transaction
advisory has made an attempt by identifying, preparing and compiling research oriented articles on such debated issues on business valuation,
relative valuation, SOTP valuation, ESOP valuation, DCF valuation, Enterprise valuation, holding company discounts, valuation in IT sector, RBI
valuation and regulatory valuations which will guide you how to apply the range of valuation techniques, including their appropriate application,
advantages and disadvantages.
www.corporatevaluations.in is an online venture on valuation promoted by Corporate Professionals Capital Private Limited, the Merchant Banking
arm of Corporate Professionals, a fast mounting consultancy group in India providing integrated financial and legal services.
We hope this compilation of research oriented articles will give its readers rich insight and adequate knowledge about key valuation issues. We shall
be happy to receive any comments /suggestions @ info@corporatevaluations.in
With warm wishes,
Valuation Team
Corporate Professionals

2
Business
valuation
Valuation is more on an art based on the professional experience of the valuer rather than a science based on
empirical studies and logics. Though internationally business valuations are governed by broadly various standards
like: Valuation Standards of American Institute of CPAs (AICPA), American Society of Appraisers (ASA), Institute of
Business Appraisers (IBA), National Association of Certified Valuation Analysts (NACVA), The Canadian Institute of
Chartered Business Valuators (CICBV), Revenue Ruling 59- 60 (USA), ICAI Valuation Standard (recommendatory)
however keeping in view the growing relevance and importance of valuation in business and investment decisions
as well as in regulatory compliance processes the development of practice of valuation as a discipline and
profession in the present context has become a necessity because of imperatives of financial markets, emerging
global economy, and changing framework of accounting and financial reporting.

3
An insight into business valuation
Knowing what business is worth and what determines its value is
prerequisite for intelligent decision making. It is pertinent to mention
that valuation of a business is not an exact science and ultimately
depends upon a number of factors like the purpose, stage of business,
assets, income and liabilities, industry scenario, market recognition,
promoters and management background and intangibles etc.
Standard and Premise of value?
To determine the value of any business, the reasons for and
circumstances surrounding the business valuation must be pre
ascertained. These are formally known as the “Standard of value”
and “Premise of value”.
To be precise, the “Standard of Value” is the hypothetical
conditions under which the business is valued and the
“Premise of Value” relates to the assumptions upon which
the valuation is based.
Key facts of business valuation
Price is not the same as value
Value varies with person, purpose and time
Transaction concludes at negotiated prices
Valuation is hybrid of art & science
Some reasons to get business valuation
Generally acceptable methodologies of valuation
There are broadly three approaches to valuation which need to be
considered in any business valuation exercise. A number of
business valuation models can thus be constructed that utilize
various methods under the broad business valuation approaches.
Most treatises and court decisions encourage the valuer to consider
more than one method, which must be reconciled with each other to
arrive at a value conclusion. Understanding of the internal resources
and intellectual capital of the business being valued is as important
as the economic, industrial and social environment.
Asset approach
Income approach
Market approach

4
Asset approach (NAV) - Generally the Net Asset Value reflected
in books do not usually include intangible assets enjoyed by the
business and are also impacted by accounting policies which may
be discretionary at times. NAV is not perceived as a true indicator
of the fair business value. However, it is used to evaluate the entry
barrier that exists in a business and is considered viable for companies
having reached the mature or declining growth cycle and also for
property and investment companies having strong asset base.
o Book value method - It is based on the balance sheet review
of assets and liabilities;
o Replacement cost method - It is based on current set up cost
of plant of a similar age, size and capacity;
o Liquidation value method - It is based on estimated realizable
value of various assets.
Income approach - The Income based method of valuations are
based on the premise that the current value of any business is a
function of the future value that an investor can expect to receive
from purchasing all or part of the business.
o Discounted Cash Flow Method (DCF) - DCF expresses the
present value of the business as a function of its future cash
earnings capacity. In this method, the appraiser estimates the
cash flows of any business after all operating expenses, taxes,
and necessary investments in working capital and capital
expenditure is being met. Valuing equity using the free cash
flow to stockholders requires estimating only free cash flow to
equity holders, after debt holders have been paid off.
o Capitalization of earning method - The capitalization
method basically divides the business expected earnings by
the so-called capitalization rate. The idea is that the
business value is defined by the business earnings and the
capitalization rate is used to relate the two.
Market based approach - In this method, value is determined
by comparing the subject, company or assets with its peers or
Transactions happening in the same industry and preferably of
the same size and region. This is also known as relative
valuation method.
o Comparable companies multiples approach- Market
multiples of comparable listed companies are computed and
applied to the company being valued to arrive at a multiple
based valuation.
o Comparable transaction multiples method - This
technique is mostly used for valuing a company for M&A, the
transaction that have taken place in the industry which are
similar to the transaction under consideration are taken into
account.
o Market value approach - The Market value method is
generally the most preferred method in case of frequently
traded Shares of companies listed on stock exchanges having
nationwide trading as it is perceived that the market value takes
into account the inherent potential of the company.

5
Other valuations approaches -
o Contingent claim approach - Under this valuation approach,
option pricing model is applied to estimate the Value. Generally
ESOP valuation for accounting purpose is done using the black
scholes method. Now even Patent Valuation is also done using
black scholes method.
o Price of recent investment approach - Under this valuation
approach, the recent investment in the business by an
independent party may be taken as the base value for the current
appraisal, if no substantial changes have taken place since the
date of such last investment. Generally the last investment is seen
over a period of last 1 year and suitable adjustments are made to
arrive at current value.
o Rule of thumb approach - Although technically not a valuation
method, a rule of thumb or benchmark indicator (like EV per room
in hotel business) is used as a reasonableness check against the
values determined by the use of other valuation approaches.
Valuation - Indian considerations
For so long, valuation has been debated in India as an art or
science and substantial part of the litigation in Mergers &
Acquisitions (M&A) takes place on the issue of valuation as it
involves an element of subjectivity that often gets challenged.
More so, as in India, there are not much regulator prescribed
standards for business valuation specifically for unlisted and
private companies so in many cases the valuation lacks the
uniformity and generally accepted global valuation practices. Even limited
judicial guidance is available over the subject in India. Further, absence
of any stringent course of action and non regulation under any statute is
also leading to loose ends.
o Institute of Chartered Accountants of India (ICAI) has recently
developed and recommended Business Valuation Practice
Standards (BVPS) aiming to establish uniform principles,
practices and procedures for valuers performing valuation
services in India.
o The introduction of concept of Registered Valuer in the
Companies Bill, 2012 (yet to be enacted) could now set the
Indian valuation standards for standardizing the use of
valuation practices in India, leading to transparency and better
governance.
Concluding thoughts
Valuation is more on an art based on the professional experience of
the valuer rather than a science based on empirical studies and
logics. Though Internationally Business Valuations are governed by
broadly various standards like: Valuation Standards of American
Institute of CPAs (AICPA), American Society of Appraisers (ASA),
Institute of Business Appraisers (IBA), National Association of
Certified Valuation Analysts (NACVA), The Canadian Institute of
Chartered Business Valuators (CICBV), Revenue Ruling 59- 60
(USA), ICAI Valuation Standard (recommendatory) however
keeping in view the growing relevance and importance of valuation
in business and investment decisions as well as in regulatory
compliance processes the development of practice of valuation as a
discipline and profession in the present context has become a
necessity because of imperatives of financial markets, emerging
global economy, and changing framework of accounting and
financial reporting.
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6
Relative
valuation
A key benefit of relative valuation analysis is that the methodology is based on the current market stock price. The
current stock price is generally viewed as one of the best valuation metrics because markets are considered
somewhat efficient. But applying multiples is not a straight forward technique and many considerations have to be
kept in mind when valuing a company. Sanity check is advised by using other valuation methods as well.

7
What is relative valuation?
Relative valuation uses the valuation ratios of comparable publicly
traded companies and applies that ratio to the company being valued
subject to necessary adjustments. The valuation ratio typically
expresses the valuation as a function of a measure of financial
performance or book value multiples (e.g. Revenue, EBITDA, EBIT,
earnings per share or book value).
This technique hinges upon the efficient market theory which indicates
that the price of exchanged securities in the market reflects all readily
available information, as well as the supply and demand effects of
educated and rational buyers and sellers. In other words, the market is
continuously evaluating each company and expressing that valuation in
bids and offers for its stock.
Advantages of using relative multiples
Usefulness: Valuation is about judgment, and multiples provide a
framework for making value judgments. When used properly,
multiples are robust tools that can provide useful information about
how similar assets are placed in the market.
Simplicity: Their very simplicity and ease of calculation makes
multiples an appealing and user-friendly method of assessing
value.
Relevance: Multiples focus on the key statistics that other
investors use. Since investors in aggregate move markets, the
most commonly used statistics and multiples will have the most
impact. These factors, and the existence of wide-ranging
comparables, help explain the enduring use of multiples by
investors despite the rise of other methods. Most valuations in
stock markets are done through this method.
Disadvantages of using relative multiples
Simplistic: A multiple has a great deal of information into a
single number. By combining many value drivers into a point
estimate, multiples may make it difficult to disaggregate the
effect of different drivers, such as growth, on value. The danger
is that this encourages simplistic – and possibly erroneous –
interpretation.
Static: A multiple represents a snapshot of where a firm is at a
point in time, but fails to capture the dynamic and ever-evolving
nature of business and competition.
Difficult to compare: Multiples are primarily used to make
comparisons of relative value. But comparing multiples always
challenging, because there are so many reasons that multiples
can differ, not all of which relate to true differences in value. For
example, different accounting policies can result in diverging
multiples for otherwise identical operating businesses.
Key issues in relative valuation
Peer selection
Current multiples or forward multiples
Adjustments to the value

8
Issue 1 - Peer selection
For relative valuations, identification of appropriate peers is a
prerequisite. Peers taken should be as close as possible to the
company being valued. It is preferred that the peer companies should
have a similar:-
Business model,
Accounting practices,
Growth pattern
Return on capital invested
Financial and operational risk.
In case peers in the domestic country are not available, then global
peers can also be taken but subject to certain adjustments which are
discussed in Issue 3.
Therefore, to select the peer group of a company, it is important to
understand the business of the company being valued. Normally the
peer group will be based on companies from the same industry.
Selecting the most appropriate peer group is thus not easy task.
Issue 2 - Current or forward multiples
Generally to the latest financials of the company a prevailing market
multiple of the comparable companies is applied to arrive at the value
of the company being valued. However while valuing early stage
companies whose values of financials in future years provide a much
better picture of the true value potential of the firm, forward financials
may be more appropriate to consider.
Current multiple of peer companies – Incase the peer
companies are mature as on the valuation date, their prevailing
valuation multiple may be applied to the forward stabilized
financials of the company being valued.
This will yield value of the company for the year for which
earnings are taken. Therefore this value has to be discounted
back to get the forward present value of the company.
(Discounting can be done using the cost of capital of the
company or the cost of equity for the time period for which
forward earnings are taken.)
Forward multiple of peer companies-Forward multiple of
peer companies is applied when the entire industry is in
evolving stage and no comparable mature company exist on
the valuation date. In this case there is no need for discounting.
Forward looking Earnings are generally preferred for valuation
purposes. Valuation is generally done with a forward looking
view and the value of a company depends more upon how
much in the future could the company/business earn than how
much it has earned till date. Therefore forward multiples are
preferred more than current multiples.
Issue 3 - Adjustments to the value
Valuation derived from relative valuation method is based on a
certain multiples like EBITDA/Sales or Profit etc. It does not take
into consideration other factors which are not reflected by the
earnings such as:-

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Surplus/Non operating assets
Surplus assets/ Non operating assets does not reflect its value
in the operating earnings of the company. Therefore the fair
market value of such Assets should be separately added to the
value derived through other valuation methodologies to arrive at
the value of the company.
However it is pertinent to mention herein that the investors may
not be willing to pay for these surplus/ non operating assets
which may call for reorganization of the company.
Adjustments for global peers
If the valuation of a company is based on comparison with the
global peers, then it should be adjusted for some differences
such as:-
Difference of tax rate in the 2 countries.
Difference in growth & Inflation rate of the 2 countries
Difference between the levels of competition in the 2 countries.
Difference in the country risk of the 2 companies
Difference of accounting treatment in the 2 companies
Thus there are many changes that are required to be made when
choosing global peers & therefore domestic peers are always preferred
for relative valuations since they are more comparable.
Concluding thoughts
A key benefit of relative valuation analysis is that the methodology is
based on the current market stock price. The current stock price is
generally viewed as one of the best valuation metrics
because markets are considered somewhat efficient. But applying
multiples is not a straight forward technique and many
considerations have to be kept in mind when valuing a company.
Sanity check is advised by using other valuation methods as well.
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10
Sum of the parts
(SOTP)
Valuation and
Value Creation
The sum of parts valuation (SOTP) technique is used to find the embedded value in different parts of businesses.
Strategic change and operational excellence creates investor curiosity and lead to value creation. However it is
observed that the market is unwilling and unable to unlock value on its own and that’s reflective of market
disconnect between fair value and value being paid by the market. While doing SOTP Valuation, assessment of
any strategic or operational management activity is essential to understand the structure modifications before
concluding value. While valuing any Company having diversified business interest, it also makes sense to analyze
the upside potential rather than downside risk.

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Sum Of The Parts Valuation (SOTP)
“Company A is doing sugar Business with Value of Say Rs 100 and
company B is doing Cement Business with Value of say again Rs. 100
then what should be the value of company C doing both the above
business by itself, On unitary basis it should be Rs 200 i.e.
Value of C company = Value of A company + Value of B company
It seems so simple; however it is not the way how valuation actually
happens in the real life scenarios. That‟s where the role of a valuer
becomes significantly important. A corporate valuer always focus on the
risk involved while undertaking any SOTP valuation and gives
appropriate discounts accordingly. In the transaction history and the
empirical research carried by various researchers it being well laid that
the market gives discount to the sum of parts value of businesses not
complimenting each other which is known as diversification discount or
portfolio discount or conglomerate discount.
In real life scenario there are companies which are engaged in
diversified business, and each business has different product line, profit
margin etc, so to value diversified companies on a consolidated level,
like consolidated sales and consolidated profit may not able to give a
true value of the company as some business segment may fetch a high
comparable companies multiple and some low Multiple. Similarly the
cash flow generating components of each Biz would also be different.
What is Sum of the Parts Valuation?
It is the Value of a company by determining what its divisions would be
worth if it was broken up and spun off or acquired by another company.
Why is SOTP Valuations done?
SOTP method is used to value a company with business
segments in different industries that have different valuation
characteristics. SOTP analysis is useful for:-
Computing the fair value of a company that is trading at a discount
to the sum of its parts.
Restructuring a company‟s value through a spin-off, or
reorganization to unlock the value of business segments to their
potential.
Diversification Discount
Diversification discount arises from sum of part valuation, due to multiple
businesses, non clarity of business specifics and lack of management
focus, market tends to give discount to the SOTP. This is known as
diversification discount or portfolio discount. Global Studies over the
years on diversified companies has shown that these companies trade
at a discount in the range of 10% to 30%. In the Indian context,
sometimes this discount is even higher around 50%.
Source: - BCG analysis

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Diversified business discounts results in sub optimal businesswise
valuation and also there remains difficulty in raising funds for a particular
business. Due to such issues and value creation potential, India has also
seen demerger of companies in diversified businesses resulting in value
unlocking which has resulted in gain in shareholders‟ wealth. Different
business groups over the years have segregated unrelated businesses
for value unlocking. There are number of companies which have
unlocked their value through demerger in Indian context like Reliance
Industries Ltd, NIIT Ltd, JK Lakshmi Cement Ltd, SRF LTD, Siemens
Ltd, Larsen & Toubro Ltd etc.
Can SOTP valuation be realized?
Value realization for diversified companies can be achieved primarily by
the management action research has shown that If the management
wants to realize the true value of the whole company, then a break-up is
the most obvious way to realize the company‟s sum of the parts
valuation.
Two facts and challenges have been noted in this respect-
There has been observed a direct nexus in the “Size of
Company” and “management remuneration” and this may be one
of the reason why not much of the spin off happens.
It is also observed that very big companies attract more
discounts as there is difficult to reorganize them due to mega
complex structures. However mid level companies can reduce
this discount significantly through Management action and
reorganization.
Concluding thoughts
The sum of parts valuation (SOTP) technique is used to find the
embedded value in different parts of businesses. Strategic change and
operational excellence creates investor curiosity and lead to value
creation. However it is observed that the market is unwilling and unable
to unlock value on its own and that‟s reflective of market disconnect
between fair value and value being paid by the market. Thus while doing
SOTP Valuation, assessment of any strategic or operational
management activity is essential to understand the structure
modifications before concluding value. While valuing any Company
having diversified business interest, it also makes sense to analyze the
upside potential rather than downside risk.
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13
ESOP
Valuation
ESOP valuation (both for accounting of “compensation expense” by company and for perquisite tax payable by the
employees) plays a significant role in the success of any ESOP scheme.
The compensation expense reduces the EPS of the company and the possibility of excess tax payout by employees may
turn the ESOP scheme unattractive. Thus proper planning of ESOP is inevitable.

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What is ESOP
Employee Stock Option Plan (ESOP) is a plan through which a
company awards stock options to the employees based on their
performance. An employee stock option is a call option meaning that
under an ESOP the employees have the right and not an obligation to
buy the shares of the company on a predetermined date at a
predetermined price. The objective of ESOP is to motivate the
employees to perform better and improve shareholders' value. Apart
from giving financial gains to the employees, ESOP also creates a
sense of belonging and ownership amongst the employees.
How is ESOP Valuation done
A) Accounting valuation
The Accounting valuation is needed for working out the employee
compensation cost at the time of ESOP grants Itself which is apportioned over
the vesting period of ESOP.
There are two methods of doing ESOP valuations- Intrinsic value method &
Fair value method.
Intrinsic value method
”Intrinsic Value” is the excess of the market price of the share under ESOP
over the exercise price of the option (including upfront payment, if any)
Example: - A company grants an ESOP to its employees whose current
market price (CMP) of the share is Rs 100 which can be exercised after 2
years for Rs 70. In this case the intrinsic value of options shall be Rs 30/- (100
– 70).
However if the CMP was Rs.50 instead, there would be no intrinsic value of
the option since the exercise price is more than CMP and in this case options
could not be explained and instead stand lapsed.
Fair Value Method
The fair value of an ESOP is estimated using an option-pricing model
like, the Black-Scholes or a binomial model. For undertaking fair
valuation of ESOPs, the Fair value method considered more
appropriate as it takes into account the various other factors like time
value, interest rate, volatility, dividend yield etc. These factors are not
considered under Intrinsic Value method which may lead to under
estimation of employee compensation cost.
The black scholes model considers various external factors that affect
the value of the ESOP whereas the intrinsic value method considers
only factors internal to the option offered. To compute the value of
ESOP options through black- scholes the following variables have to be
considered:-
Expected life of the option
Exercise price
Fair value per share
Expected volatility of share price
Expected dividend yield
Risk-free interest rate
Key issues in valuation of ESOPs through black-scholes model
Issue 1: - Expected life or total life of the option
For the purpose of valuations we need to consider the likely life of
option and not the total life of the option. For calculation of expected life
it is recommended to use the Average of the maximum life of option
and the minimum life of option for each vesting of a particular grant.

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Issue 2: - Volatility of unlisted companies
For listed companies historical volatility in their own share prices is
taken, the problem arises on how to compute volatility of unlisted
companies.
Indian accounting guidance norms recommends unlisted companies to
consider volatility as zero since there is no market price of the unlisted
companies. This may however lead to incorrect value of the ESOPs.
An alternative for computation of the Fair Value of an ESOP option of
unlisted company is to consider historical volatility in the share prices of
other similar listed comparable companies should be considered and
taken as the expected volatility for the unlisted company.
Issue 3: - Dividend Yield
Payment of dividend reduces the price of a share. Dividend paid during
the ESOP period is not cumulated for ESOP holders; therefore dividend
paid before the ESOP is exercised may be reduced while computing
ESOP value.
Thus companies are required to estimate the future dividend yield rate
(i.e. dividend per share divided by value per share). The company‟s
historical dividend yield rate can be used to estimate its expected future
dividend yield.
Issue 4: - Risk-free interest rate
The Risk free rate being considered for the calculation is the interest
rate applicable for a maturity equal to the expected life of the options
based on the zero-coupon yield curve for Government Securities or 10
years Government bonds.
B) Tax Valuation
This valuation is required for determination of value of perquisite
taxable in hands of employees, to comply with applicable provisions of
Indian Income Tax Act, 1961 and notification issued by CBDT in this
respect.
Notification no. 94/2009 dated 18.12.2009 issued by CBDT, provides
that for the purpose of clause (vi) of sub-section (2) of section 17, the
fair market value of any specified security or sweat equity share, being
an equity share in the company not listed at any recognized stock
exchange, shall be such value of the share in the company as
determined by a merchant banker on the specified date. No method
has been prescribed for undertaking such valuation. This also includes
shares of companies listed on overseas stock exchange as the
Overseas Exchanges do not qualify as the Recognized stock
exchanges in India.
Concluding thoughts
ESOP valuation (both for accounting of “compensation expense” by
company and for perquisite tax payable by the employees) plays a
significant role in the success of any ESOP scheme.
The compensation expense reduces the EPS of the company and the
possibility of excess tax payout by employees may turn the ESOP
scheme unattractive. Thus proper planning of ESOP is inevitable.
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16
Discounted Cash
Flow
Valuation
Discounted Cash Flow (DCF) method is one of the most important finance tools to derive value of a company based on the
future cash flows of business. However it needs to be used with great care as it’s a very sensitive model where the values get
affected significantly with a small change in assumption like beta value, terminal growth rate, risk free rate of return and
market return. It is strongly recommended to do sanity check with the market approach to valuation like CCM and asset
approach i.e. net asset value before concluding the DCF value.

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Discounted Cash Flow –The Prominent income approach to
valuation
While undertaking the valuation of any company there are three broad
approaches to valuation namely Asset approach, Income approach
and Market approach. Discounted cash flow (DCF) is one of the
prominent income approaches to valuation and is used to estimate
the attractiveness of any investment opportunity on the basis of future
cash flow projections of business. So far DCF is considered as the
most scientific financial tool to derive the value of any company based
on parameters like projected cash flows, cost of capital, growth cycle
of business, perpetual growth rate etc. This method mostly yields
control valuation result and is sensitive to even minor changes in
these parameters.
“The Discounted Cash Flow method expresses the present value of
the business attributable to its stakeholders as a function of its future
cash earnings capacity. This methodology works on the premise that
the value of a business is measured in terms of future cash flow
streams, discounted to the present time at an appropriate discount
rate”.
Discounted Cash Flow can be used to derive the value of equity
shareholders of company and also the value of the firm/company.
Discounted Cash Flow to equity
This method uses the Free Cash Flows to Equity (FCFE) and values
the benefits that accrue to the equity shareholders of the company.
The value of the equity is arrived at by estimating the FCFE and
discounting it at the cost of equity (Ke).
This methodology is considered to be the most appropriate basis for
determining the earning capability of a business. It expresses the value
of a business as a function of expected future cash earnings in present
value terms.
FCFE = Net Income - Net Capital Expenditure - Change in Non Cash
Working Capital + New Debt – Debt Repayment
Discounted Cash Flow to firm
Discounted Free Cash Flow to Firm (FCFF) measures the enterprise
value of a company i.e. (Value of Equity + Value of Debt), no adjustment
is separately needed for debt (inflows and outflows) for arriving at
the FCFF. Here the discounting of free cash flow to firm is made by
weighted average cost of capital ('WACC') to arrive at the enterprise
value.
FCFF = EBITDA – Taxes- Change in Non Cash Working Capital- Capital
Expenditure
Key Issues and challenges in Discounted Cash Flow Methodology
Cost of equity calculation
Weighted average cost of capital calculation
What should be the terminal growth rate
How is cost of equity (Ke) calculated?
Cost of equity (Ke) is the required rate of return of a shareholder who
invests in the equity of a company. Cost of equity is generally calculated
using the Capital Asset Pricing Model (CAPM)
According to CAPM
Cost of equity = Risk free rate + Beta*(Market return – Risk free rate)

18
Where,
Beta of a stock is the relation of its returns with those of the capital
market (BSE/NSE) as a whole. However there are certain risk like
small company risk (SCRP) and specific company risk (CSRP) which
affect the cost of equity so it is recommendatory to add these risk
premiums and factor these in CAPM, which is detailed below
Modified CAPM
Cost of Equity = Risk Free Rate + Beta*(Market Return – Risk Free
rate) + SCRP+ CSRP
Issues while computing Ke through CAPM
How is Risk free rate calculated
How to calculate Beta of an unlisted company whose shares
are not traded.
How to account for small company risk & company specific
risk
What is risk free rate
It is the theoretical rate of return of an investment with zero risk. The
risk-free rate represents the interest an investor would expect from an
absolutely risk-free investment over a specified period of time.
What should be taken as risk free rate
The 10 Year Yield on Indian Government Bond is currently taken as
the risk free rate by most analysts but since the India Government
Bond is a coupon/interest paying bond, it also carries some risk called
the Reinvestment Risk (i.e. the risk that coupons/interest paid by the
bonds might not be able to be re-invested at the same rate as off today)
Since there are no Zero Coupon bonds of the Indian government, the
National Stock Exchange of India has developed a 'Zero Coupon Yield
Curve' (ZCYC) that helps in valuation of sovereign securities across all
maturities. With the help of this ZCYC, an estimate rate of return on 10
year Indian Government Zero Coupon Bond can be calculated. The rate
calculated through ZCYC i.e. Yield of a Zero Coupon Bond should be
taken as the risk free rate since it does not have any reinvestment risk
as there is no payment before the bond matures. As of February 2012,
Zero Coupon Yield is around 8.29%
How to calculate Beta of an unlisted company
Beta which measures the systematic risk is calculated by finding the
correlation of the return of a company with those of the financial market
i.e. Sensex in Indian context. Since unlisted companies do not have any
trading price, thus it is difficult to calculate the beta of an unlisted
company.
The beta of an unlisted company can however be calculated on a
relative basis by adjusting the average beta of its comparable
companies for differences in Capital Structure of the unlisted company
with the listed peers.
Adjustment to Beta
The beta of an unlisted company taken from the average of its
comparable listed companies must be adjusted for difference in the debt

19
structure of the company & its peers but un-levering the average beta
values of its listed peers and then levering the average calculated
beta of listed peers with the unlisted companies Debt Structure.
How to un-Lever Beta and then Lever it again?
Unlevered Beta = levered beta / [1+ (1- tax rate)* comparable
company‟s avg. debt/equity ratio]
Therefore to Un-lever the beta, we have take into account the
average tax rate of the comparable companies and their average
debt-equity ratio.
Levered Beta = Unlevered beta * [1+ (1- tax rate)*company
debt/equity ratio]
To Lever the beta again we use the actual tax rate & debt equity
Structure of the Unlisted Company whose beta we had to estimate.
Why to account for Small Company Risk & Company Specific
Risk
Small Companies are generally more risky than big companies.
CAPM model does not take into consideration the size risk and
specific company risk (management quality, forex risk etc.) as Beta
measures only systematic risk and Market Risk Premium. These risks
should also be taken into account while computing the cost of equity.
Therefore instead of CAPM, modified CAPM should preferably be
used for calculating the Cost of Equity.
How is weighted average cost of capital calculated?
Weighted average cost of capital is the cost of capital of the firm i.e. the
providers of finance of a firm including equity share holders, preference
share holders & providers of long term debt.
Calculation of WACC
WACC is calculated using the Proportionate cost of Equity & Cost of
Debt (after tax)
The formula for WACC is:-
MVe = Total market value of equity,
Re = cost of equity,
MVd = The Total market value of debt,
Rd = cost of debt,
T = tax rate
Issue 1:- Market Value or book value of equity
The important point to note in the calculation of WACC is it requires the
market value of equity, rather than its book value. Taking the book
value might result in heavy overestimation of the value derived through
DCF since book value of equity might lead to a lower WACC and in turn
a low discounting rate. Here Market value of equity can be estimated
through Comparable Company Analysis

20
Issue 2:- Does change in Debt have any Impact on calculation of
DCF to Firm?
A big misconception while computing Discounted Cash Flow to Firm
is that it does not get affected due to change in debt in the projected
years.
Yes, it is true that change in debt does not change the cash flow for a
firm. But a change in capital structure due to increase or decrease in
debt in projected years changes the WACC in the projected years.
Therefore a major change in capital structure of a company in future
projections must be taken into account by changing the WACC for the
projected years.
What should be the terminal growth rate?
The terminal growth rate is long term average growth rate of a
company which estimates the rate at which a company would
perpetually grow when its business stabilizes. Since it is tough to
estimate the perpetual growth rate of a company, it is preferred to
take the perpetuity growth rate factoring in long term estimated GDP
of the country, which assumes that the company would grow at pace
with economy. The terminal growth rate should also factor in the type
of industry as well as the number of years for which discount period
has been considered.
Concluding thoughts
Discounted Cash Flow (DCF) method is one of the most important
finance tools to derive value of a company based on the future cash
flows of business. However it needs to be used with great care as it‟s a
very sensitive model where the values get affected significantly with a
small change in assumption like beta value, terminal growth rate, risk
free rate of return and market return. It is strongly recommended to do
sanity check with the market approach to valuation like CCM and asset
approach i.e. net asset value before concluding the DCF value.
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21
Enterprise
Valuation
Enterprise Valuation (EV) is the total value of any business which represents all stakeholders and often looked at while
acquiring/ selling any business or making any strategic decision and is dependent on the standalone value of the
company, its subsidiaries and the Value of surplus assets. All the above issues are relevant for working out EV.

22
Enterprise Valuation : The market value of the whole business?
Enterprise valuation (EV) is an economic measure which reflects the
market value of the whole business. It is a sum of claims of all the
security-holders: common equity holders, debt holders, preference
shareholders, minority shareholders etc. Enterprise valuation is one of
the fundamental metrics used in business valuation, financial modeling,
accounting, portfolio analysis, etc.
EV= market value of equity + market value of debt + minority interest at
market value + preference capital at market value – cash & cash
equivalent + market Value of non Operating Assets.
Enterprise valuation is the present value of the claims of all stake-
holders against an enterprise where an enterprise is financed with debt
and equity. If the company has no non-operating assets, firm value can
be valued by estimating future free cash flows and discounting those
cash flows with an appropriate rate of return (which may vary from year
to year) that embodies the returns required by creditors and
shareholders of the firm.
Since this is essentially the value of operations of the firm, if there is any
non-operating assets, the value of such non-operating assets should be
added separately to arrive at the firm value or enterprise value.
In short enterprise value is the value shared by all investors, unlike debt
value or equity value, which are shared only by creditors or by equity-
holders respectively.
Key issues and challenges while calculating EV
Should only cash or excess cash be deducted?
Should only cash be deducted or even cash and cash
equivalents?
Should debt be taken at market value?
Treatment of debt if taken at year end or for setting up a new
business?
Treatment of loans & advances given to subsidiary company?
Issue 1 - Should only cash or excess cash be deducted?
The 1st question is - why cash is deducted? - Think of enterprise
valuation as the theoretical takeover price. In the event of a buyout, an
acquirer would have to take on the company's debt, but would pocket its
cash which could be used to pay off debt or be treated as surplus funds
for the acquirer.
What is excess cash & Why should it be deducted instead of total cash
excess cash is defined as „total cash (in balance sheet) – operating cash
(i.e. minimum required cash) This is because, operating cash is required
to sustain operations (working capital) and manage contingencies. If
total cash is used to pay down debt, the company will have nothing left
for working capital requirements and contingencies!
Practical problem – It is very difficult to estimate excess cash in a
company. One of the solutions is to estimate average cash/sales or total
balance sheet size of the company‟s relevant Industry and then estimate
if the company being valued has cash in excess of the industry‟s
average.

23
Issue 2 - Should only cash be deducted or even cash equivalents?
Yes, cash equivalents should also be deducted since most companies
invest their excess cash in short term money instruments or investments.
Therefore it is important to deduct these small term investments
considering they are not used for operation of the company.
What are cash equivalents? „near cash‟ items that include investments
that are actively traded, available for sale and held to maturity are called
cash equivalents.
Issue 3 - Should debt be taken at market value or book value?
To arrive at fair valuation, all the values should be taken at the market
value. Thus debt should also be taken at market value.
In the present economic conditions the depreciation in rupee has
increased the fair value of principal repayment in terms of Rupees.
Therefore it is important to take the market value of debts since its
market value can be significantly higher from the book value in such
cases.
Issue 4 - Treatment of debt taken at the yearend or for setting up a
new business?
Practically debt which has not had an impact on the sales should not be
included in the enterprise valuation since it has had no contribution in
sales. Therefore debt taken near end of year should be added at a
weighted rate & debt used for setting a new plant (which is not yet
operational) should not be included at all.
Practical difficulty: -Some portion of debt taken at the yearend may be a
part of cash & cash equivalents or other non-operating assets which we
subtract from the enterprise valuation
Issue 5 - Treatment of loan & advances given to other companies?
If you are valuing Company on standalone basis & applying Comparable
companies Multiples Method, then in that case If the company has given
loan and advances to other companies not forming part of its business,
then you should add back the loan & advances given to them, because
in that case loan & advances are not captured in the company‟s
standalone business value, as it is a form of surplus asset.
Concluding thoughts
Enterprise Valuation (EV) is the total value of any business which
represents all stakeholders and often looked at while acquiring/ selling
any business or making any strategic decision and is dependent on the
standalone value of the company, its subsidiaries and the Value of
surplus assets. All the above issues are relevant for working out EV.
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24
It’s been observed that valuers apply holding company discount in the range of 40 to 60% on the value of holding companies.
But adjustments should be made to the discount depending on the dividends paid and received by the holding company and
also expected future scenario of the company. The type of investments the holding company holds also has an impact on the
discount that should be applicable for holding company in question. It may also be stated that reorganization of holding
company may also result in reduction of this discount and thereby value creation.
Valuation Discount
Applicable to Holding
Companies

25
Holding company
Where a company is holding a large chunk of investments in other
companies and it‟s not having any material business operations of its
own, is called a “holding company” A holding company typically does
not have its own business operations other than the retention and
management of assets in anticipation of future sale or trade or may be
as a tool of corporate restructuring. The holding company thus derives
its income primarily through the return on the assets held for
investment purpose. To be particular, Income of holding co. is only the
dividends received by it‟s from the investments made in other
companies.
Valuation of holding companies
There are two ways to look at value of a holding company-
Value based on income
As the income of a holding company (dividends) may be negligible
when compared to the Value of its underlining Assets i.e. investments,
it may not make sense to Value it based on Income alone.
Value based on assets
The value of a holding company should be essentially based on the
underlining assets it holds i.e. based on the value of its subsidiary /
associate companies. Therefore a valuer should evaluate the company
based on the value of its assets than on the value of its operating
income.
Valuation discounts applicable to holding companies
When valuing holding companies valuer should consider three types
of discounts as the value of a holding company does not follow the
sum of parts rule, and generally it‟s seen that the value of a holding
company is significantly less than the sum value of all its
subsidiaries / associates. The value of holding company thus suffers
from three types of discounts majorly.
Liquidation discount
As such the value of holding company is based on the sum values
of its subsidiaries. However liquidation discount is generally
provided for built in or embedded capital gains even when no
liquidation is planned, more so as far as the value if assets of the
subsidiary have to pass to the holding company, it must pay taxes.
Holding period, rate of tax etc determine this discount.
Discount for lack of control
The holding company value also gets discounted on account of lack
of control, for example a holding company holds 100% stake in a
subsidiary and a holding company holds 15% stake in a company
both have different values preposition i.e. the one in which 100%
stake is held have a controlling value and the one in which 15% is
held shall not command that much proportionate value. Often
discount for lack of control on associates is applied. The less% of
holding, the more the discount & vice versa.
Discount for lack of marketability
Due to separate legal entity often more restrictions exist upon
transfer of assets of subsidiary company by holding company which

26
leads to discount for lack of marketability in the hands of the holding
company.
Under any investment, the buyer is concerned with the holding period,
the risk exposure and the cash return. The longer the term to liquidity,
greater the risk of sale and lower the dividend yield, the higher the
marketability discount.
Empirical research for holding company discount
Under few of the research on holding company discount carried in
Indian context it is observed that the holding company trades at a value
significantly less than its net asset value, sometimes as high as 50%.
Can such discounts be mitigated?
As discussed above, the value of a pure holding company with no
operating assets of their own trade at a heavy discount to their NAV.
But this discount can in certain cases be mitigated and in some cases
trade at a premium depending upon:-
Future Expectation from the Company
In cases where markets expect some M&A- consolidation of the
holding company, in such cases the holding company is generally
valued near to its NAV or its discounts set on the lower side if it holds
controlling stake subsidiary companies. This is because due to the
M&A reorganization, there may exist only single entity having direct
control on all assets.
Also a holding company that is expected to sell its stake in other
companies/ other investments also tend to trade at a lower discount
since the value of the holding company‟s investments are realized and
expectation of dividend by the shareholder increases.
Dividend paid by subsidiaries
It is generally seen that holding companies which receive dividends
from their subsidiaries trade at a lower discount as compared to
other holding companies which do not receive a dividend.
This is because the only income of a pure holding company is
dividends received from its subsidiaries. Also holding companies are
expected to pay out dividends received from its subsidiaries to its
own shareholders since dividend distribution tax is exempt for the
holding company if it distributes dividend in the year it receives
dividend from its subsidiary.
Type of investment made:-
If a holding company‟s investments include holding a controlling
stake in other companies then it generally trades at a lower discount
than a company holding a non controlling stake in other companies.
This is because of the level of control the holding company has on
its subsidiary and also Sales of its subsidiary are reflected in the
consolidated financial statements of the holding company.
Concluding thoughts
It‟s been observed that valuers apply holding company discount in
the range of 40 to 60% on the value of holding companies. But
adjustments should be made to the discount depending on the
dividends paid and received by the holding company and also
expected future scenario of the company. The type of investments
the holding company holds also has an impact on the discount that
should be applicable for holding company in question. It may also
be stated that reorganization of holding company may also result in
reduction of this discount and thereby value creation.
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27
Valuation in
Information
Technology Sector
Recently Just Dial has been listed in Indian market at a PE of 55x under search
engine category. It has got good response due to first entry in Indian market. It is
also worth mentioning that it is trading at double the value of its peers in global
markets like Google. However, it has been observed that the valuation trend in the
high growth segment of IT industry (Search Engine, E-Commerce & Social
Networking) is on an upswing and though there exist limited public listed
companies in this segment, majorly all trade at very high valuation multiples with
corresponding high volatility owing to their sensitive business models prone to
competition with new technology and recent developments. Where would their
valuations be stabilized would be decided in times to come.

28
Valuation in IT ( Information Technology) sector
It has been believed in the market that “Technology has the shelf life of a
banana.” If that happens then what factors drives the value of information
technology based companies whose survival is totally dependent on that.
The answer of this question is not so easy as it appears to be, As whatever
the size of organizations large or small face the same dilemma: scare
resources, choosing and deploying the right resources at right time & at right
place to maximize the organization performance.
Why sub sector categorization is necessary
There is a difference in valuing a company which invest in IT to increase the
efficiency of its business and the Company whose survival is totally
dependent on IT because Companies with a view to increase the efficiency
might Invest in IT and often viewed as a cost center, and when a department
is viewed solely as a cost center, budgets get squeezed year over year, but
that would not be in the case of IT co‟s, as their view of investment might be
different.
Therefore, to make the proper judgment on the parameters that derives the
value of companies in IT sector. We have divided the IT sector into various
sub- sectors.
Overview of IT sector
The IT sector can be broadly classified into following sub-sectors:
ITES (BPO) – Major corporations across the world outsource their back-
office operations to some companies. E.g. employee payroll for a US
company‟s global workforce is maintained by an Indian BPO. Slowly the
definition is expanding to Human resources, accounting, logistics, legal
processes etc.
IT- Hardware - The stuff you can actually see and touch is hardware.
This would include laptops, desktops, storage devices, networking
devices, LCD, printers etc.
IT- Education - This segment provides training for employment in the
other segments. This would include companies providing various
certification courses, like Java, Oracle etc. These companies also
provide training for employees in corporate sector.
ITES (KPO) - It refers to the outsourcing of knowledge intensive tasks
and functions to outside experts.
IT- Software – These companies help in developing and implementation
of different software for their clients worldwide, which could be use for
documentation, security services, banking software‟s etc.
IT - Search Engines - Search engines are the programs that search
documents for specified keywords and return a list of the documents
where the keywords were found.
IT – E-Commerce - Leverage the unique qualities of internet and web
uses internet technology to create markets that bring buyers and sellers
together.
IT- Social Networking - It is an online service, platform, or site that
focuses on facilitating the building of social networks or social relations
among people.

29
Key valuation drivers in IT sector

30
Key valuation parameters used in IT sector
Valuation Parameters Rationale
Valuation Multiples
Price to Book value As IT Software companies do not have significant fixed assets. Therefore, Price to Book value ratio will not provide the
clear picture for IT software sector. However this may not be in case of IT hardware company as it involves huge
investment in plant and machinery.
Price to Earning This ratio can be used to evaluate the share price of IT sector co‟s.
Price to sales Generally, this ratio is not accepted due to the high gestation period involves in the IT sector projects. As the project
which may not be profitable now may generate revenue after some period of time.
EV/Sales This ratio is commonly used in the valuation of companies whose operating costs exceed revenues, even for startups
valuer can also rely on this ratio.
Price/Earnings to
Growth Ratio
As the software industry has largely dependent on future potential, therefore this ratio can be use as rule of thumb for
valuation purpose.
EV/EBITDA If the company has cash-generating power, then EV/EBITDA can be used as valuation tool. But this tool does not take
into account whether that EBITDA has been financed from equity or debt source.
EV/Free Cash Flows Companies which have strong cash flows, for them EV/FCF can depict the clear picture.
Rule of Thumb
EV/ No. of seats This ratio can be used as validation ratio for Co‟s involved in BPO sector as for them human intellectual factor is not that
much important in comparison for other IT sector co‟s. But concern is required to be put on the area upon which the
respective BPO is operating, as we cannot say that the value of two BPO‟s are same on the basis of No. of seats
ignoring the fact that one BPO is operating at small area in comparison to other.
EV/No. of subscribers This parameter is most widely used in valuing the Co‟s in E-commerce sector.
EV/No. of Users This parameter work as rule of thumb mainly for valuing social networking sites.
EV/No. of Hits More the number of visitors, more the number of page views helps in gauge the traffic and popularity trends of search
engines.
EV/Work Force As the main assets in IT sector co‟s are their employees or technical staffs which can be evaluated by considering the
hiring cost and training cost that co‟s bear for their employees. But this methodology does not consider intangibles
values associated with specific employees such as personal reputation, relationship and know-how.
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31
RBI has prescribed DFCF as the only valuation method in case of FDI for unlisted companies but has not provided any
guidance on its technical aspects. Since valuation is essentially a forward looking exercise, it is generally believed that DFCF is
one of the most acceptable valuation method used by business valuers worldwide; however DFCF for all FDI transactions (like
minority stake/start up valuation etc) may not yield fair value in line with the commercial understanding. However law being
such, suitable logical adjustments may be necessary on a case to case basis. The price to be computed using the DFCF
method would normally be much higher than that computed under the erstwhile CCI guidelines which followed a fixed formulae
approach. Therefore it is needed to be used with great care as it’s a very sensitive model where the values get affected
significantly with a small change in assumption like beta value, terminal growth rate, risk free rate of return and market return.
As such, the valuation approaches / methods being applied must take into account the standard of value and premise of value
and also suitable adjustments to make valuation discounts and premium based on the facts of each case.
RBI Valuation

32
RBI guidelines for valuation of equity shares
For Foreign Direct Investment (FDI) transactions, notification no. FEMA
20/2000-RB dated May 3, 2000, as amended from time to time deals
with Foreign Exchange Management (transfer or issue of security by a
person resident outside India) Regulations, 2000.
In terms of schedule 1 of the notification, an Indian company may issue
equity shares/compulsorily convertible preference shares and
compulsorily convertible debentures (equity instruments) to a person
resident outside India under the FDI policy, subject to inter alia,
compliance with the pricing guidelines. The price/ conversion formula of
convertible capital instruments is also require to be determined upfront
at the time of issue of the instruments.
In order to make the valuation of shares in line with global business
valuation practices and maximize forex earnings for Indian residents,
Reserve Bank of India (RBI) had recently introduced revised valuation
guidelines in case of allotment or transfer of equity shares / compulsory
convertible instruments by Indian resident to nonresident and vice versa.
Now for all unlisted companies having Foreign Direct Investment (FDI),
RBI has prescribed mandatory valuation of shares strictly through
Discounted Free Cash Flow (DFCF) method only, a prominent method
based on income approach of valuation which is entirely based on the
“future cash earning capacity” of any business and thus often lead to
optimum value scenario (from exchange control perspective). Before
DFCF method was prescribed, the basis of valuation for RBI
transactions was Controller of Capital Issues (CCI) guidelines which
determined a conservative valuation by considering the average of Net
Asset Value („NAV‟) the company‟s Profit Earning Capacity Value
(„PECV‟), which was arrived at based on its past financial performance.
This valuation article is covering different situations envisaged under RBI
Law for both FDI as well as Overseas Direct Investment (ODI)
transactions and some valuation methodologies are also suggested
based on our practical experience and global valuation principles.
FDI valuation guidelines
In case Indian resident is unlisted company
Under the revised guidelines, the approach taken in the CCI guidelines
are abandoned, and the applicable allotment / transfer price for FDI in
unlisted shares is required to be not less than the price determined
based upon the DFCF method as determined by a SEBI registered
category - I merchant banker or a chartered accountant.
In case Indian resident is listed company
Under the revised pricing guidelines, allotment / transfer of listed
company shares in India by Indian Resident to non-resident shall not be
made at less than the price at which the preferential allotment of shares
can be made under the SEBI (ICDR) Regulations 2009, which provides
that If the equity shares of the issuer have been listed on a recognized
stock exchange, then the equity shares shall be allotted at a price not
less than the higher of the following:
“Average weekly high and low closing price over a trailing six month
period, or a trailing two week period, from the "relevant date of
transaction.”

33
In case of transfer of shares from non - resident to Indian resident,
the same DFCF price would govern to be the maximum price for
transaction.
ODI valuation guidelines
Mandatory valuation by merchant banker where the investment is
being made outside India for more than USD 5 million, valuation of
the shares of the foreign company shall be made by a category I
merchant banker registered with SEBI or an investment banker /
merchant banker outside India registered with the appropriate regulatory
authority in the host country.
In case investment is by way of swap of shares where foreign
company is involved irrespective of the amount, valuation of the
shares will have to be made by a category I merchant banker registered
with SEBI or an investment banker outside India registered with the
appropriate regulatory authority in the host country.
In all other cases, valuation of shares can be made by a chartered
accountant or a certified public accountant.
it is clarified herein that no method for valuation of shares has been
prescribed by RBI in case of ODI valuation. From a exchange control
perspective the price of shares issued by foreign entity shall not be more
than the price determined by SEBI registered category- I merchant
banker / CA as the case may be.
This Space is intentionally left blank

34
Face to Face comparison of CCI guidelines and RBI guidelines
Particulars Valuation before April 21, 2010 Valuation after April 21, 2010
Guidelines in force CCI guidelines In case of FDI transactions:
Listed company: Market value as per SEBI preferential
allotment guidelines
Unlisted company: DFCF
In case of ODI transactions:
No method has been prescribed
Methods prescribed Net Assets Value (NAV)
Profit Earning Capacity Value(PECV)
Market value (in case of Listed Company)
Discount 15% Discount has been prescribed on account of lack of
marketability
No such discount has been prescribed
Historical / Futuristic It is based on historical values It is based on future projections
Possibility of variation in value
conclusion
As valuation is more formulae based, final values came
standardized
As valuation is more dependent on assumptions
and choice of factors like growth rate, cost of
capital etc, value conclusion may vary
significantly.

35
Glimpse of RBI guidelines for FDI and ODI valuation and our suggested approach
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36
Regulatory
Valuations
The key role of the valuer is to remove the bias and subjectivity in the valuation process and find the fair value of the business
based on science, logic, empirical studies, case law and last but not the least the professional experience of the valuer on an
objective basis. As such, the valuation approaches / methods being applied must take into account the standard of value and
premise of value and also suitable adjustments to make Valuation discounts and premium based on the facts of each case. The
ongoing concept of “registered valuer” is also expected to bring clarity on the methods of Valuation and would lead Valuation
practice as a discipline in India.

37
Introduction
It has rightly been said that “What has never been doubted, has never been proven”. Valuation is a specialized field which has evolved in response
to developments in law, taxation, finance, accounting, and economics and has graved impact on financial health of the valued company. Connected
to this aspect, there has been increasing interest seen in valuation by all stakeholders.
Navigation to valuation approaches
The rapid globalization of the world economy has created both opportunities and challenges for organizations leads to uncertainty blowing across
global markets which raise the importance of independent valuations all over the world. There is no simple recipe to determine the economic worth
of the company, However Globally there are only three broad approaches to valuation:
Asset approach: The asset based approach views the business as a set of assets and liabilities that are used as building blocks to
construct the picture of business value. Since every operating business has assets and liabilities, a natural way to address this question is to
determine the value of these assets and liabilities. The difference is the business value. However, it is used to evaluate the entry barrier that
exists in a business and is considered viable for companies having reached the mature or declining growth cycle and also for property and
investment companies having strong asset base.
Income approach: The Income based approach of valuations are based on the premise that the current value of any business is a function
of the future value that an investor can expect to receive from purchasing all or part of the business. It is generally used for valuing
businesses that are expected to continue operating for the foreseeable future.
Market Approach: In this approach, value is determined by comparing the subject, company or assets with its peers in the same industry of
the same size and region. Most Valuations in stock markets are market based. This is also known as relative valuation approach

38
Valuation – Indian perspective
At present there are not much prescribed standards and codes on valuation in India and in many cases the valuation lacks the uniformity and
generally accepted global valuation practices. A number of business valuation models can be constructed that utilize various methods under the
broad business valuation approaches.
In determining approaches and methods to use, the valuation professional must exercise discretion. Each technique has advantages and
drawbacks, which must be considered when applying those techniques to a particular business. Most treatises and court decisions encourage the
valuer to consider more than one method, which must be reconciled with each other to arrive at a Value conclusion. Understanding of the internal
resources and intellectual capital of the business being valued is as important as the economic, industrial and social environment
Regulatory valuations
To keep pace with ever evolving economic and business environment, various regulatory bodies in India (RBI, Income Tax, SEBI, etc) have
prescribed different and in some cases even conflicting valuation methodologies creating practical difficulties. In some cases, absolute discretion is
given to valuers on one hand and in other cases strict adherence to practical method like NAV, DFCF, Market price etc is sought. However, in most
cases, there is not much guidance on how to apply a particular method like DFCF; comparable companies market multiples method. A
diagrammatic view for all regulatory valuations in India is provided on next page:

39
Comprehensive comparison of regulatory valuations in India

40
About
Corporate Professionals
Offering varied legal & financial services, 'Corporate Professionals' has emerged as an innovative
leader in delivering corporate advisory & solutions. Aiming to become a one-stop-shop offering
integrated legal and financial solutions, the Group has successfully completed a high number of
corporate transactions in the last couple of years. We have successfully engaged in and
executed over 3000 assignments of more than 1200 corporate houses, domestic as well as
international, across several Industries.
The Group has distinctively positioned itself as Merchant Banker (SEBI Cat-I license) with
Boutique Investment Banking & Transaction Advisory services and as Legal Advisors with high
quality comprehensive Corporate Laws, Tax & Regulatory services. With an endeavor to satisfy
our clients' stated as well as unstated needs, we adopt the most feasible and legally viable
approach to execute assignments in a seamless, cost effective and time bound manner. High
Integrity and Confidentiality in dealing with clients and assignments undertaken is deeply
inculcated in our team.
The Group prestigiously owns a strong skill set that comes from its research oriented, multi-
disciplinary, young and dynamic team. With right blend of legal and financial skills, continuous
focus on research and effective use of Information Technology, Corporate Professionals is
creating customized products, for different class of clients. Innovative flair of executing
assignments with problem solving zeal and use of Technology has enabled us to offer path
breaking solutions. Not just for executing Clients' Assignments but also in internal management,
the Group adheres to a system driven approach.
The Group dedicates around 30% working time of its professional team on continuous research
in the dynamic legal and financial fields, with an object of creating a knowledge hub, extensive
knowledge dissemination and to develop skills of its team to deliver high quality services.
“Corporate Professionals” refers to one or more of group companies and its network of firms and
other entities, each of which is a separate legal, independent entity. For more details, please visit
www.corporateprofessionals.com.

41
Mr. Chander Sawhney
Vice President
M: +91 9810557353
D: +91 11 40622252
E: chander@indiacp.com
Mr. Maneesh Srivastava
Senior Manager
M: +91 9871026040
D: +91 11 40622255
E: maneesh@indiacp.com
Mr. Gaurav Kumar Barick
Assistant Manager
M: +91 8130141874
D: +91 11 40622241
E: gaurav@indiacp.com
Mr. Sameer Verma
Assistant Manager
M: +91 9911945607
D: +91 11 40622216
E: sameer@indiacp.com
Our Valuation Team

42
As Close As You Need
As Far As You Go……
Delhi Office
D-28, South Ex., Part-I, New Delhi-110049,
D-38, South Ex., Part-I, New Delhi-110049,
T: +91 11 40622255
M:+ 91 9871026040,
E: info@indiacp.com
Mumbai Office
520, Mastermind- I, Royal Palms Estate, Aarey Colony,
Goregaon East, Mumbai -400065
T: +91 2267109044
M:+ 91 9820079664
E: mahipal@indiacp.com
Indian Offices
Overseas Offices
Our Associates
India
Ahmedabad, Allahabad, Bangalore, Bhopal, Bhubaneshwar, Chandigarh, Chennai, Coimbatore, Goa, Guwahati, Gwalior,
Hyderabad, Indore, Jaipur, Jammu, Kanpur, Kochi, Kolkata, Lucknow, Ludhiana, Patna, Pune.
Overseas
Bulgaria, Belgium, British Virgin Islands, Canada, China, Costa Rica, Cyprus, European Union, Germany, Hongkong, Ireland,
Japan, Kenya, Malaysia, Mauritius, Singapore, Sri Lanka, Switzerland, The Netherlands, Turkey, United Arab Emirates, United
Kingdom, United States.
Bedford Office (United Kingdom)
2-4 Mill Street, MK40 3HD, Bedford
Switchboard: +44 (0) 2030063240,
E: ukoffice@indiacp.com

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