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ABCD - Business Valuation Report A B C D Private Limited Business Valuation Report August 2007 Confidential.

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Presentation on theme: "ABCD - Business Valuation Report A B C D Private Limited Business Valuation Report August 2007 Confidential."— Presentation transcript:

1 ABCD - Business Valuation Report A B C D Private Limited Business Valuation Report August 2007 Confidential

2 ABCD - Business Valuation Report 2 Table of Contents Terms of reference ……………………………………………………………………………………………..Page. 4 Background………………………………………………………………………………………………………Page. 6 Valuation Principles……………………………………………………………………………………………. Page. 7 CCI Guidelines on Valuation…………………..……………………………………………………………….Page. 8 Valuation Methods………………………………………………………………………………………………Page. 9 Basis & Approach………………………………………………………………………………………………..Page.10 Valuation Methodology…………………………………………………………………………………………..Page.11 Business Value: –Summary of Valuation…………………………………………………………………………………….Page.12 Major assumptions in our valuation…………………………………………………………………………….Page.14 Major assumptions underlying Valuation………………………………………………………………… Page.20 Disclaimers………………………………………………………………………………………………………..Page.21

3 ABCD - Business Valuation Report 3 Table of Contents…contd Appendices: –Historical Financials Balance Sheet……………………………………………………………..Appendix-1 Profit & Loss Account……………………………………………………..Appendix-2 –Latest Management Accounts Balance Sheet……………………………………………………………..Appendix-3 Profit & Loss Account……………………………………………………..Appendix-4 –Net Asset Value Method………………………………………………………...Appendix-5 –Price Earning Capacity Value Method…………………………………………Appendix-6

4 ABCD - Business Valuation Report 4 Terms of Reference XYZ, Chartered Accountants are required to arrive at and report on the Business Value of A B C D for the limited purpose of the proposed transfer of share holding of EFGH, Mauritius (holding company of ABCD), to another group company, in its entirety and in the context of the implications of transfer pricing, so as to establish an arms length price for the shares sought to be transferred. PREMISE OF VALUATION / VALUATION DATE The Valuation date is as at August 2007 on the premise of a going concern entity.

5 ABCD - Business Valuation Report 5 Background ABCD Private Limited (ABCD), the wholly owned subsidiary of EFGH, Mauritius is engaged in the manufacture and sale of textiles. The manufacturing facilities are located at Coimbatore, Trichy and Nagercoil in South Tamilnadu About 40% of the total turnover represents readymade garments which are completely exported, while the balance 60% relate to cloth manufactured of which 10% are exported. The major target markets for ABCD are represented by Garment Retailers in the country.

6 ABCD - Business Valuation Report 6 Background The company had its shares listed in the stock exchanges in the country but has since got them de-listed consequent to the exercise of buy back and reduction of share capital. In view of the proposal to transfer the stake holding in the company to another entity in the Group ABCD is keen to assess the fair value of its shares. ABCD has therefore engaged XYZ, a international firm of Chartered Accountants to ascertain the Business value of its Indian operations as on date of this report, taking into account the financial position reflected by the audited financial statements of the earlier years and the unaudited management accounts as at 31 st March ABCD have furnished to XYZ its past financials and the management accounts as at 31 st March XYZ has accordingly completed its assessment of Business value of the Indian operations of ABCD in August 2007 and hereby submit this valuation report.

7 ABCD - Business Valuation Report 7 Background Industry Scenario: Textile Industry has been experiencing global competition in the domestic market particularly with the advent of Chinese products dumped in to the country. The end products of ABCD (cloth) which find ready market with the garment retailers in the country has recently been witnessing shrinking off-take as a ripple effect of downslide at the end-users business economies. The first quarter of the current year has indicated such downslide with slimming bottom-line suggestive of shrinking margins and tardy growth. With the back op of the emerging business front, the management is none too sanguine about any significant growth in business volumes in the coming years and would not prefer to hazard crystal gazing future trend. To sum it the coming months would be a period of test of sustenance and consolidation rather one of any perceptible growth.

8 ABCD - Business Valuation Report 8 Our Valuation Principles Our task as a valuer of the business of ABCD is to determine the fair value of its business which incidentally represents a value that would be arrived at as an arms length transaction. Our valuation is not adjusted for any special purchaser who has particular connections or relationships with the company or business and can obtain benefits such as rationalization, synergy in operations etc. In view of the fact that the valuation is in respect of a subsidiary of a foreign company, the Guidelines by the erstwhile Controller of Capital Issues has been is given due consideration for application in the methods adopted. The value so arrived at under NAV is compared with PECV and the fair value deduced by adducing suitable weights to each in the context of the background of the companys present business environment.

9 ABCD - Business Valuation Report 9 Valuation Methods Net Asset ValuePrice Earning CapacityDiscounted Cash Flows (FCFE)** Reckons with assets and liabilities carriedPast performance given due importanceCash Flow available to stakeholders estimated from projected income statement and Balance Sheet for certain years until business stabilize. Assets marked to market wherever applicablePost tax earnings capitalised at specified percentageDiscount rate selected to represent the expected rate of return to prospective investors under similar investment opportunities. Devolvement of contingent liabilities duly weighed in. Normalised profits reckoned for computationWeighted Average Cost of Capital (WACC) reflects the opportunity cost to the providers of capital and hence reckoned as the relevant discount rate. In effect the net worth adjusted for realisable values of assets and contingent liabilities represents the fair value The average tax incidence over the years has been considered for purposes of arriving at PAT. WACC= Cost of Equity Capital (COEC) +Cost of Debt Capital (CODC) COEC is computed using Capital Asset Pricing Model (CAPM) Represents the minimum value the shareholders would look for to divest Adopted only in specific circumstancesCOEC adjusted for risk premium using appropriate beta (β) coefficient Business value based on the premise that the adjusted net worth represents the minimum fair value of the stakeholders interest in a a company Business value based on the principle of the post tax earnings represent normal return expected by investors. Business Value represented by the PV of future free cash flows that can be withdrawn from the company ** Not considered for our valuation for reasons stated elsewhere

10 ABCD - Business Valuation Report 10 Guidelines of Controller of Capital Issues (CCI) Highlights of CCIs Guidelines in valuation of Equity Shares of Companies Net Asset ValuePrice Earning Capacity Value Intangible assets to be ignoredNet Profit after tax to be reckoned with Revaluation Reserve need not be reckoned unless done >15 years ago Extraordinary items of expenditure and income to be ignored Any reserve not created out of profits not to be considered Average profits arrived at from past financials to be in the case of a manufacturing company. Provision for gratuity to employees on actuarial valuation principles t o be considered Capitalization rate could be lowered under specified circumstances. Adequate provisioning for doubtful debts need to be created. Miscellaneous expenditure shall be written off in full. Past book losses to be deducted from value Devolvement from Contingent liabilities to be reckoned

11 ABCD - Business Valuation Report 11 Basis & Approach Our approach and scope of examination for this valuation are as follows : The valuation covers only the financials of the existing operations of ABCD at its manufacturing divisions in Tamilnadu. The valuation is done on the principles applicable to a going concern. The latest financial statements (unaudited) upto 31 st March 2007 provided to us has been considered for purposes of arriving at the fair value under the Net Asset Value and Price Earning Capacity Value approach adopted. We have not considered the Discounted Cash Flow Method, as in our opinion no reasonably certain estimation can be made as to the companys future financials as: –The industry is going through an uncertain period –The growth during the explicit period and beyond the terminal year cannot be estimated with reasonable accuracy. Interviews and correspondence with the Companys management, a review of published market data and any available public information relevant to the industry in which the Company operates have also been relied upon by us in our valuation process.

12 ABCD - Business Valuation Report 12 Valuation Methodology Net Asset Value Based on March 2007 management accounts (unaudited) Profit Earning Capacity Based on past financials and the management accounts for the FY2007 Based on past financials and the management accounts for the FY2007

13 ABCD - Business Valuation Report 13 Business Value Equity Share Value Net Assets Value Method Subject under valuation WEIGHTED VALUE PER SHARE Rs 117 Rs : 40 Adduced Weights Basis of Ascertainment Profit Earning Capacity Method Rs 94

14 ABCD - Business Valuation Report 14 Major Assumptions 1The Chinese syndrome in Indian textiles market would inhibit growth of players. 2In the backdrop of the above it would be difficult to hazard a guess as to the kind of growth manufacturing units in the country are in for. 3Though future free cash flow based approach with suitable weight adduced to it would be handful in determining the fair value, in the present scenario it is likely to be misleading and hence ignored for options. 4Nevertheless, the PECV based approach is adopted with lesser weightage to be in tune with the sentiments in the market. 5NAV based value is given its due weightage as it is the minimum the stakeholders would settle down for and in the context of intra-group transfer it assumes importance.

15 ABCD - Business Valuation Report 15 Historical Balance Sheet 2007(1Qr) Sources of Funds: Shareholders Funs Share Capital Reserves and Surplus Loan Funds Application of Funds: Gross Block Less: Depreciation Net Block Capital Work-in-progress Investments Deferred tax assets Current assets, loans and advance Less: Current liabilities Net Current Assets(364000)(985014)624277( ) Rs in 000s Appendix -1

16 ABCD - Business Valuation Report 16 Past Performance FY06FY05FY04FY03 Income: Sales less Excise Duty Other income (including interest income) Total Income Expenditure: Raw materials consumed Purchases for resale Sales tax Depreciation Other expenses Interest FG/WIP movement(236402)(79230)105398(973) Total Expenditure Profit before taxation Taxes-Current Deferred (36000) -FBT Profit after tax &before extraordinary items Surplus Brought forward Extraordinary items [debit/(credit) ] Dividend (including tax) Transfer to General Reserve Balance Carried to Balance Sheet Rs in 000s Appendix-2

17 ABCD - Business Valuation Report 17 Balance Sheet as at Share Holders Funds Share Capital Reserves and Surplus Loan Funds: Secured Loans 0 Unsecured Loans 9000 Total Application of Funds: Net Block of Assets Investments Current Assets and Loans & Advances Less: Current Liabilities Total Rs in 000s Appendix-3

18 ABCD - Business Valuation Report 18 Particulars Sales Profit before Interest, Depreciation & Taxes (PBIT) Interest (net) (3) Depreciation 54 Profit before tax (PBT) 197 Profit on sale of properties 48 Taxes 72 Profit after tax 173 Profit &Loss account for the quarter ended 31 st March 2007 Rs in 000s Appendix -4

19 ABCD - Business Valuation Report 19 Net Asset Value Working ParticularsBook Value as at AdjustmentsValue Net Fixed Assets Investments Current Assets: Inventories Receivables Loans& Advances Cash &Bank balances Total Assets Less: Current Liabilities Loan Funds9000- Contingent Liabilities Total Liabilities Net Assets Equity Shares Outstanding (Nos) Value Per Share Rs in 000s Appendix -5

20 ABCD - Business Valuation Report 20 Price Earning Capacity Value Working ParticularsWeighted Profits Average Profits before tax802,127 Provision for tax320,497 Average profit after tax481,629 No of equity shares outstanding (Average) ( Nos) Earning per share ( Rs) % Capitalisation of average profits after tax ( Rs) Appendix 6 Rs in ooos

21 ABCD - Business Valuation Report 21 Price Earning Capacity Value (Basic Data) Year/ period endedProfit before taxNormalised Profit before tax Normalised Profit after tax Share Capital Number of shares O/s (Nos) ** Rs in 000s ** Annualised profit

22 ABCD - Business Valuation Report 22 Disclaimers In preparing our report, we relied substantially upon the accuracy and completeness of the information provided to us in the form of past audited financials and the management accounts upto March We have not performed anything in the nature of an audit. Since our procedures in valuation do not constitute an audit or any other form of attestation, we do not express a formal opinion on the information provided by the management except for making suitable adjustments wherever deemed necessary. In the course of our analysis of the financials furnished to us by ABCD, we held discussions with the executives of the company so as to confirm our understanding and the impact of our perspectives factored therein. The statements and opinions included in this report are given in good faith and in the belief that such statements and opinions are not false or misleading. The value arrived at by us is based on our estimation of probable devolvement out of matters which are sub-judice as the claims by the relevant authorities have been contested by the company and final decision is yet to be given. Any deviation in the ultimate fructification of such contingent items would impact our estimated value under this report. We are not required to give testimony in court, or be in attendance during any hearings or depositions, with reference to the company being valued, unless previous arrangements have been made. This valuation assumes that the Company will continue to operate as a going concern, and that the character of its present business will remain intact. Our compensation is not contingent on an action or event resulting from the analyses, opinions, or conclusions in, or the use of this report.


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