We were privileged to have a 2-day workshop on June 26th and 27th with ARC Financial Services Ltd., a one stop financial services firm designed to enable its clients to improve the effectiveness of their decision-making and meet their desired profitability and growth objectives. ‘Team ARC’ brings together a group of professionals with rich experience in Investment Banking (IPOs, PE, VS, M&As), Financial Research, Strategic Consulting, Corporate Finance and Investor Relation Services. Two of the lead faculty in ARC Academia – the India office of Wall St. Training, a pioneer financial training firm – came forward to share their rich insights with us. Our workshop was taken by Tapan Jindal, a Chartered Accountant and a Bachelors in Commerce from Panjab University, who has rich experience in Investment Banking, Equity Research, Corporate Finance, IPO Consulting, Content Management and Investors Relation Services and co-founded ARC Financial Services in early 2008 after previously being with Fidelity Investments and Himanshu Jain, a qualified Chartered Accountant and Bachelors in Commerce from Panjab University, who co-Founded ARC Financial Services after working with McKinsey & Co. and brings with him exquisite experience in Strategic & Financial Research, Consulting, Insurance & Corporate Finance.
In this workshop, we learned about the techniques employed for valuation of a company. “What is the business worth?” Although a simple question, determining the value of any business in today’s economy requires a clear understanding of financial analysis as well as sound judgment from market and industry experience. Himanshu and Tapan told us that the answer can differ among everyone who does the valuation and depends on several factors such as one’s assumptions regarding the growth and profitability prospects of the business, one’s assessment of future market conditions, one’s appetite for assuming risk (or discount rate on expected future cash flows) and what unique synergies may be brought to the business post-transaction. Thus, the purpose of this workshop was to provide an overview of the basic valuation techniques used by financial analysts.
Basic Valuation Methodologies
For determining value, we learned that there are several basic analytical tools that are commonly used by financial analysts. These methods have been developed over several years of research and refinement and are based on financial theory and market reality. However, Himanshu and Tapan remined us that these tools are just that – tools – and should not be viewed as final judgment, but rather, as a starting point to determining value. The techniques we became aware of are:
1. Relative Valuation – This is the one of the most frequently used methods, which compares a stock's valuation with those of other stocks or with the company's own historical valuations. Relative valuation is a simple way to unearth low-priced companies with strong fundamentals. As such, investors use comparative multiples like price-earnings ratio (P/E), enterprise multiple (EV/EBITDA) and price-to-book ratio all the time to assess the relative worth and performance of companies and to identify buy and sell opportunities.
2. DCF Valuation - Discounted cash flow (DCF) analysis uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. If the value arrived at through DCF analysis is higher than the current cost of the investment, the opportunity may be a good one.
3. Deal Comps or Analysis of Selected Acquisitions (for M&A): It implies values based on multiples and premia of acquired private and public companies and is very relevant in absence of public traded competitors.
We began from the fundamentals and built upon them by applying the theoretical models in valuation of Idea Cellular Ltd., which gave us a hands-on experience in applying the concepts in a real-life situation. This workshop was an enriching experience for all of us. We are extremely grateful to the college and to Finance Club for having been given the opportunity to learn from the experts and we look forward to more of such elevating workshops.
