Business Valuation and

Corporate Restructuring
Dr. Latha Chari

Course Coverage
Fundamentals of Business Analysis
role of financial reporting, Elements of
business analysis EIC approach (1)
Business analysis cases (2)
Business valuation models Concepts
(1)
Application of valuation methods
Cases (3)
Project and Presentation (2)

Assessment
2 Class tests 15% weightage
1 Project 20% weightage
End term 50% weightage

Books - Reference
Business Analysis and Valuation
Healy and Palepu
Damodaran on Valuation
Valuation McKinsey publication
Mergers and Acquisitions Kamal
Gosh Ray

Todays class
Introduction scope and EIC approach
Understand Business analysis
Need, Stages
Understand the objectives of analysis
in each stage from a equity valuation
perspective

Business Analysis
Analysis of various performance
dimensions of a business with
objectives like
Internal decision making - New project
expansion, competitive strategy for the
forthcoming year etc.
External decision stock investment,
acquisitions, mergers, PE, VC, lending
decisions, rating decisions etc.

HOW THE INFORMATION NEEDS

ARE MET ?

Elements of Business
analysis
All business analysis is done using
data available in the public domain in
most cases. The Elements:
Business strategy analysis
Accounting analysis
Financial Analysis
Prospects & projections

The Importance of Strategy

Analysis

Strategy drives the actions of an

organization.
Studying a firms strategy helps to identify
the Sources of Value Creation. IT provides:
An understanding of what drives risks,
profitability, and competitive advantages
A basis for future performance to be
forecasted
An idea of how to measure the success of
a firms actions

Sources of Value - Multi

business

Multi-business Strategy measure

economic consequences of managing
multiple businesses hard to practice !!!
Its generally found that multi businesses
trade at a discount compared to focused
business
Value is unlocked by spinoffs or asset sales
Examples: Reliance, Godrej Industries,
L&T
Reasons- Multi-business decision driven by
SIZE, Problem of goal congruence,
alignment, capital markets find valuation
difficult* ?? (*Do u agree??)

Comparative valuation
ratios

Sources of Value Special

resources
Brand name, proprietary know-how,
Spl. Organisational processes,
distribution channel
Examples
ARE THESE SPECIAL RESOURCES
SUSTAINABLE??

Sources of Value - Acquisition

Related business
Unrelated business Which of them
create value???
India examples: Top deals in 2011
The Reliance BP deal, Essar exits
Vodafone (Unrelated), Fortis
Healthcare (India) Ltd, announced that
it will merge with Fortis Healthcare
International Pte Ltd.,

Industry Analysis - Key

concepts

WHY Industry analysis

Porters five forces
Competitive strategy analysis
Corporate strategy for multi business
organisation

Industry affects firm

Firms strategy is affected by the Industry
Environment and competitive forces within the
industry affect firm
Risk and return attributes of various industries
vary
Returns tend to vary across industries at
different points in the business cycle.
Industry performance (and risk) is not
necessarily stable over time (industry life cycle)
Industry structure and competition determines
performance

Porters model Five forces

Bargaining power of
suppliers

Bargaining power of
Customers

Threat of new entrants

Threat of Substitutes
If there are substitutes with low prices
and similar performance parameters,
this can prove to be a threat to existing
products.

Competitive Rivalry

Industrys sensitivity to
business cycles
Low sensitivity Pharma, Utilities,
Defence
High sensitivity Durables, capital
goods, Auto, Construction
How to measure sensitivity
Plot Industry sales across various time
periods and compare with GDP growth,
Industrial production index (SALES
SENSITIVITY)

Industrys sensitivity to
business cycles
Firms with greater variable (and less
fixed) costs are less sensitive to
business conditions
Firms with high fixed costs (high
operating leverage) are more risky as
small swings in business conditIons
have large impact on profitability.
(Leverage sensitivity)

Accounting Analysis
Evaluate the appropriateness of
accounting policies
Assess the degree to which the firms
accounting captures business
performance
UNDO accounting distortions

What to look for in accounting

analysis?

Poor performance with unexplained changes in

accounting
Unexplained transactions that boost profits
Increase in accounts receivables, inventory,
high
Gap between operating profits and operating
cash flows, tax income and reported income
Unexpected large asset write offs
Auditors reports and related party transactions
Change in accounting policy, contingent
liabilities

Revisit - Financial
Accounting

OWN or control resources??

Depreciation/impairment estimates
intangible and tangible assets
Unearned revenue understated
examples
Liability Loans from discounted
receivables with or without recourse
Lease liability distortions
Warranty, pension, post retirement
obligations

Financial analysis
Growth and Profitability analysis
Growth Revenue, profits and assets
Profitability Margin on sales and
capital
Asset utilization affects profitability
Techniques
Decomposition of drivers and analysis
Common size statements

Economy Vs.Markets
Are stock returns associated with global
and domestic macroeconomic conditions?
Examine the association of stock prices
with:
Global Economy
The Domestic Macro-economy
Government Policies
Business Cycles

Global Economy
Firms export prospects, access to FDI,
competitiveness affected by global
economy.
Impact of financial crisis of 2007
liquidity access to finance, FDI;
employment, consumer demand,
foreign investments, protectionist
policies.
Exchange rates
Investor confidence

Domestic Macroeconomy

A key ingredient of company growth (which is

important in the determination of cash flows) is
the growth in the economy.
All other things equal, any company will do
better in a young, growing and prosperous
economy, versus an older, over-regulated
economy with a lower growth rate (that is why
large companies in mature economies are
always searching for new markets in
economies at an earlier stage of development).
Economic growth can depend on government
policy which aims to fine tune the economy
(boost or ease demand, control the inflation,
unemployment etc)
Government policy can also affect interest
rates and inflation that in turn determine the
required rate of return.

Demand and Supply Shocks

(Industry impact)

Oil price changes, Nilam

the storm
Destroys crops, etc.

What is business cycle?

Recurring pattern of recession and growth
Transition points are peak and troughs

Leading and lagging indicators

of business cycles
Average weekly hours of
Manufacturing Weekly average
number of hours worked by production
personnel in manufacturing industries.
Because employers typically make
adjustments to work hours before
expanding or reducing their workforce,
this indicator leads the business cycle
Employment /unemployment data

Leading and lagging indicators

of business cycles
Building permits, new private
housing units:
Number of residential building
permits issued signifies the level of
construction activity, which usually
precedes most other types of
economic production.

Leading and lagging indicators

of business cycles
Stock prices, Index
Manufacturers' new orders,
consumer goods and materials
Manufacturers' new orders, nondefense capital goods
Interest rate spread, 10-year
Treasury bonds minus federal funds
Corporate Advance tax

Leading and lagging indicators

of business cycles
Industrial production index and
manufacturing trade and sales, are
coincidental indicators
The lagging indicators include
inventory to sales ratio, consumer
credit, retailer loans etc.