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THE COUNCIL
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COMPANY ANALYSIS
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Part-I (Business Analysis)
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Agenda
Business Analysis1. Product & Services2. Business Model & Strategies3. Key Business Drivers
– Growth – Value
4. Segment Analysis
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Business Analysis
1. Product & Services
2. Business Model & Strategies
3. Key Business Drivers
4. Segment Analysis
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Let’s discuss the concepts –taking example of MUL
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1. Product & ServicesMaruti’s presence in market segments
Brand Segment Capacity (CC) Launched in
M800 A1 796 Dec-83
Omni MPV 796 Nov-84
Alto A2 796/1061 Sep-00
WagonR A2 1061 Dec-99
Zen A2 993 May-93
Zen Estio A2 1061 Dec-06
Swift A2 1298 May-05
Swift- Diesel A2 1298 Jan-07
Baleno A3 1590 Dec-99
Esteem A3 1298 Nov-94
M1000 A3 1000 Apr-92
Versa MPV 1298 Oct-01
Gypsy UV 1298 Dec-85
Vitara UV 2700 Apr-03
Source: Maruti web site
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2. Business Model
Basic Revenue generation through– Direct selling of vehicle in show room – After sales service & maintenance– Sale of spare parts– Fleet management for corporate (N2N)– Financing option– Vehicle Insurance– True Value stores, which buy, sell and
exchange used cars
n.b. The points in italics are operated through subsidiaries
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2. Key Strategies
• Offering Passenger vehicle to most of the segments
• Services Business offers synergistic value
• Cross selling of allied products and services
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3. Key Business Drivers
Revenue (Growth) Divers– Strong sales & service network– Enjoys higher customer satisfaction– Global hub for Compact cars
Value (Profit) Drivers– Efficient operational practices
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4. Segment AnalysisA2 segment zoomsdue to followingreasons:• Higher disposable
income with middle class people which constitute larger portion of total Indian population.
• These models are highly acclaimed by customers.
Segmental Revenue Performance for J FM-07
0
10000
20000
30000
40000
50000
J an-07 Feb-07 Mar-07
Num
ber
of u
nits
A1 MPV A2 A3 UV
Source: Company Report
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4. Segment Analysis
Enhancing all customer related services in a transparent manner under one roof.
Services Revenue on a growth trajectory
0
50
100
150
200
AMJ 05 JAS 05 OND 05 JFM 06 AMJ 06 JAS 06 OND 06
Rs in
Mill
ion
-50%
0%
50%
100%
Service Revenue YoY g,%
Source: BSE
Service Business
• During 2005-06 the company reported growth of 26% in their spare & accessories business.
Spares & Accessories Business
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Thank You
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Part-II (Financials & Projections)
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AgendaFinancials & Projections
1. Profit & Loss Account2. Balance Sheet3. Cash Flow Statement4. Financial Ratios
i) Profitabilityii) Liquidityiii) Efficiencyiv) Valuation
5. Key Assumptions
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1. Profit & Loss Account
Hyperlinked File: Profit & Loss Account-MUL
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2. Balance Sheet
Hyperlinked File: Balance Sheet-MUL
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3. Cash Flow Statement
Hyperlinked File: Cash Flow Statement-MUL
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4. Financial Ratios
i) Profitability
ii)Liquidity
iii)Efficiency
iv)Valuation
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i) Profitability Ratios
ROA EBIT / Total Asset
ROE PAT (after Pref. Div.) / Net Worth
ROCE EBIT / Capital Employed
DuPont Analysis-ROE Decomposition (1*2*3*4*5)
1. PAT/PBT (Tax Efficiency)
2. PBT/EBIT (Interest Burden)
3. EBIT/Sales (Operating Profit Margin)
4. Sales/Total Assets (Asset Turnover)
5. TA/NW (Financial Leverage)
Hyperlinked File: Profitability Ratios -MUL
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ii) Liquidity Ratios
Current Ratio Current Assets / Current Liabilities
Acid Test Ratio
Quick Assets / Current Liabilities(Quick Asset= Current Asset-Inventory)
Debt Equity Ratio
Total Debt / Owners’ fund
Hyperlinked File: Liquidity Ratios - MUL
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iii) Efficiency Ratios
Activity Ratios
Asset Turnover Ratio
Turnover / Total Assets
Working capital Turnover Ratio
Turnover / Net working capital
FA Turnover Ratio Turnover / Total Fixed Assets
CA Turnover Ratio Turnover / Total Current Assets
Debtor Velocity Credit Sales / Avg. A/c Receivable
Hyperlinked File: Efficiency Ratios - MUL
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Margin RatiosEBITDA Margin EBITDA / SalesPre-Tax Margin PBT / SalesNet Profit Margin
PAT / Sales
iii) Efficiency Ratios
Hyperlinked File: Efficiency Ratios - MUL
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iv) Valuation Ratios
Adj. EPS PAT (excluding minority interest) / Total Number of outstanding shares
Cash EPS (PAT+ Depreciation) / Total Number of Outstanding shares
Dividend Per Share Total Dividend declared / Total Number of Outstanding shares
Book Value Per Share Net Worth / Total Number of Outstanding shares
Hyperlinked File: Valuation Ratios - MUL
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5. Key Assumptions
Hyperlinked File: Key Assumptions-MUL
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Thank You
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Part-III: Company Valuation
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Agenda
1. Valuation– Valuation Methodology– DCF– Relative Valuation
2. Key Risks3. Valuation Perspectives
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i) Valuation Methodology
ii) Discounted Cash Flow
iii) Relative Valuation
1. Company Valuation
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i) Valuation Methodologies
VALUATION METHODOLOGI
ES
MARKET CAPITALIZATION
APPROACH
DISCOUNTED CASH FLOW APPROACH
ADJUSTED BOOK VALUE APPROACH
MULTIPLES
LEVERED
UN-LEVERED
P/EP/CFP/BV
EV/EBITDAEV/EBITEV/REVENUE
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ii) Discounted Cash Flow (DCF)Discounts the anticipated future cash flow
DPV= FV/ (1+K)n
Where,DPV= Discounted Present ValueFV= Future Valuen= Number of yearsK= Cost of Capital
WACCCost of Capital - From which point of view?- What model?- Normalization of data
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ii) Discounted Cash Flow (DCF)
Where, E= equity V= Value of the firm (i.e. total market value of equity + total market value of
debt)D= total debt component
Ke= cost of equity Kd= cost of debt t= corporate tax rate
Cost of Capital
WACC=(E/V)*Ke+ (D/V)*Kd*(1-t)
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ii) Discounted Cash Flow (DCF)
Different type of DDM
•Zero Growth Model•Constant Growth Model•Two-stage Model•H-Model (n.b. For detail refer Annexure-V attached to the Report)
Dividend Discount Model
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ii) Discounted Cash Flow (DCF)
FCFF= NOPLAT+ Amortization/ Depreciation- Inc /(Dec) in working capital- Capital Expenditure+Inc /(Dec) Deferred Taxes
Free Cash Flow to Firm
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ii) Discounted Cash Flow (DCF)
FCFE =
FCFF- Interest (1-t)+ Net Borrowing (from long term
perspective)
Free Cash Flow to Equity holder
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iii) Relative Valuation
• The value of an asset is arrived by– Compared to the values of similar asset in the market
• Steps
1. Identify comparable assets and obtain market values of these
2. Convert these market values into standardized values• since the absolute prices cannot be compared.
3. Compare the subject asset with standardized value or multiple
4. Take suitable multiples for the differences5. Mention clearly the assumptions used
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2. Key Risks
a. Nature & types
b. Gravity
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a. Nature & types
• Over dependence on domestic market • Competition hotting up in the growth
engine of compact cars • Maruti does not own diesel engine
technology • Soaring metal Market may cast its spell
on margins • Rising Bank interest rates will impact
the demand and operational cost
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b. Gravity
• Launch of newer models on a continuous basis is a big challenge
• Fuel efficiency, Maintenance and Safety rank very high in the buyers’ decision-making matrix.
• Vendor development is crucial
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3. Valuation Perspectives
a. Challenges
b. Applicability to different industries
c. Preparing a valuation Report
d. Case Discussions
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a. Challenges• DCF model is very sensitive to
– Growth rate projection and – Weighted average cost of capital
(WACC).• Comparative Multiple:
No two companies have – Same product profile and target
segment. – Same capital structure – Similar management practices
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a. Challenges ...contd
• Cyclical Business• Private Company• Spin offs/ Selling of a division• Firm with Negative Earnings• Young & Start-up firm• Financial Services Companies
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b. Applicability to different industries
i) Pharmaceutical Industryii) Sugar Industryiii) Information & Technologyiv) Logistics
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i) Pharmaceutical Industry
• Product Pipe line and patents• R&D cost as a % of Sales• Size and growth of therapeutic
segment• Contract manufacturing opportunity• Generics opportunity• Access to distribution networks
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ii) Sugar Industry• Production capacity• Cogen unit• Flexible manufacturing system to
produce ethanol, alcohol• Availability of raw material• Governmental policies about levy
sugar, subsidies, minimum prices for farmers
• World scenario of sugar supply, consumption and balance.
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iii) Information & Technology• Revenue by geography
• Customer’s Industry Vertical/ Domain • Revenue generated from various contract like
fixed price contract type or fixed time contract • Services offering like application development
maintenance, enterprise solution & others.• Revenue from repeat business & new business• Business generation from off shore and onsite
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iv) Logistics
• Occupancy Rate• Frequency of congestion free air traffic • Income generated per passenger per seat• ATF as a % of total sale (prime operating
expense)• Size & growth of the sector• Competition among players• Government regulation towards civil
aviation
- Airways
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• Load factor (cargo handling)• Bunker cost as a % of total sales (prime
operating expense)• Cargo handling expenses as a % total sales• Size & growth of the sector• Government regulation towards the sector• Export/ Import Factor of the country• Aging factor of ships
- Shipping
Logistics
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3(iii) Preparing a Valuation Report
• How to Write a Valuation Report?
• Process for preparing a Valuation Report
• Data Sources for Valuation Reports
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How to Write a Valuation Report?Don’ts
– Never start Valuation before understanding the business– Never Start with Financials– Don’t give too much focus on the past – leave that to the
historiansDo’s
– Be Brief and Concise– Put Relevant Information form the point of view of
Investment– Should contain Graphs/Tables/Charts– The Graphs/Tables/Charts should be analyzed and not
described in text– Analyses should facilitate/enable in investment decision
making– Assumptions should be stated after being validated
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Process for Valuation Reports• Follow the Deductive Logic Path to
Understand the Business of the company by going through– Industry Reports– Company Website– Equity Research Reports
• Prepare a Plan on the Research Objective and Approach
• Identify Time Schedules and Milestones
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Process for Valuation Reports
…Contd• Identify the parameters to be taken
• Segmental Analysis• Competitive Evaluation• Future Prospects• Earnings Outlook
• Decide the Valuation Methodology taking into account the Industry in which the company is operating
• Study the Capital Structure of the Firm and Notes to Accounts
• Arrive at the Growth Rates and Discount Rates• Calculate the Value of the company• Validate the Values • Prepare the report
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Data Sources for Equity Research• SEC Filings – 10K, 10Q, 8 K
• News Items• Company Website• Annual Reports
– Chairman’s Speech– MD&A– Balance Sheet – P/l Account– Cash Flow Statement– Notes to Accounts
• Research Reports• Company Press Releases• Industry Associations/Forums• Government Sources
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Process for Reports
Understanding Business
Identifying Time schedule & MilestonesPlan of Action
Deciding on Valuation Model
Predicting Growth Rates
Identifying Key Parameters
PROCESS CYCLE
Content & Quality Check (Levels 3)
Report Preparati
on
Delivery
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3(iv) Case Discussions on• Sell side: Maruti Udyog
• Buy side : Valuation Attractive ( Gammon India)
• Changing Gear in Auto
• ICRA valuation
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Thank You
