Transcript Document

VALUATION APPROACHES
Valuations....drive the markets!!!
8,000
BSE Sensex
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Aug-04
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Oct-04
Dec-04
Feb-05
Apr-05
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Aug-05
Prologue


In the financial services world, Valuations are used for various purposes

For valuing the shares of a company

In Mergers & Acquisitions

In evaluation of new projects
However, the the basic principle of Valuations remain the same


What is the “Potential” of the business?
The word “Potential” refers to the future and thus most of the valuation approaches are
about estimating the future and converting it into hard numbers

So it is not just financial concepts but ability to project and estimate the future potential


2
Discounted Cash Flow is the most robust methodology for valuations
This Valuation is then benchmarked against various proxies

Trading Comparables

Transaction Comparables
Valuation Methodologies
Valuation Methodologies
Value Range
Discounted
Cash Flow
Analysis
Comparable
Acquisitions
Analysis
Comparable
Companies
Analysis

Inherent value of
business

Acquisition valuation

Trading valuation

Present value of
projected free
cash flows

Value based on
multiples paid for
comparable
companies in sale
transactions

Value based on
market trading
multiples of
comparable
companies
4
Sum of parts/
Asset Valuation

Liquidation or break-up
analysis – assets presumed
to be representative of
business value

Value of component parts
– used when enterprise
comprises of several
discrete businesses
Enterprise Value v/s Equity Value
Enterprise Value
=
Value of all the assets of a business
Equity Value
=
Value of the shareholders’ equity
Equity Value
=
Enterprise Value - Net Debt (1)
Enterprise
Value


Unaffected by leverage
Multiples of:
 Sales
 EBITDA
 EBIT
 Size (such as
capacity or number
of users)
Net Debt
Equity Value
(or Market Value)

A function of leverage

Multiples of:

Net Income (Earnings)

After Tax Cash Flow

Book Value
(1) Net Debt equals Total Long-Term Debt + Preferred Stock + Capitalized Leases + Short-Term Debt (other than
working capital debt) - Cash and Cash Equivalents
5
A DCF valuation has three main components
 Credible forecasts for the explicit period
 Typically the horizon reflects the time in which steady state of business is achieved
 Revenue, cost and capex forecasts used to derive the unlevered free cash flows to the company
 These forecasts are validated through an understanding of industry, performance trends and
outlook
 Estimation of discount rate
 Discounting of future cash flows to make them equivalent to present value
 Discount rate is typically the cost of capital of target companies with profiles comparable to the
target – essentially it should reflect the Opportunity Cost of Capital
 Terminal value
 Terminal value comprises of value of the cash flows beyond the explicit forecast period extending
upto perpetuity
 Captures value of the business that grows at a steady state growth rate
6
Unlevered Free Cash Flow
 Unlevered free cash flow is the conceptual cash flow available for distribution to all capital providers
 Tax shield effect of interest removed from cash flows to estimate unlevered free cash flows
 Unlevered Free Cash Flow = After tax EBITDA - Capital Expenditures - Increase In Non-Cash
Working Capital
 EBITDA = EBIT + Amortization + Depreciation = Earnings before Depreciation, Interest, Taxes
and Amortization
 Non-Cash Working Capital = Non-Cash Current Assets - Non-Debt Current Liabilities
7
Principles of computation of Discount Rate

Weighted Average Cost of Capital or WACC used to discount free cash flows in order to estimate
the present value of an enterprise

Defined as the weighted average sum of the cost of financing the enterprise, mainly through equity
and debt


Cost of equity and cost of debt are weighted by the respective contributions of equity and
debt in the steady state of business operations - to remove the effect of different financial
structures in different companies
WACC =
Where:
re x E
D+E
E
D
=
=
re
rd
=
=
+
rd x D
D+E
Market Value of equity
Market Value of debt
(typically approximate with book value but be careful)
return on equity derived from CAPM
after tax return on debt
(assumed to be weighted average cost of debt)

CAPM assumes consistent, long-term target capital structure (D/E ratio)

Leveraged financing in maturing markets points to a Debt/Equity ratio of 30/70
8
Computation of WACC ingredients
Cost of Debt
 Cost of Debt is the opportunity
cost of lending, net of tax shield
derived through leveraging
 Cost of debt assumed at the
prevailing long term lending rates
for similar companies
 Cost of debt = rd = Y (I - T)
Where: rd = after tax-cost of long
term debt (after tax)
Y= gross redemption yield on debt
T= effective marginal tax rate
Cost of Equity
 Cost of equity represents the return expectations
of equity shareholders from investment of
comparable risk
 Computed by adding a market risk premium
weighted by comparable asset risk over the risk
free return on a long term security
 Cost of equity = re = rf + B *(r m - rf)
Where: re=
rf =
r m=
B=
9
the required future market
return on the equity of the
Company
the risk free rate
the return on the market
(factoring in the country risk
also)
the beta of the Company
Estimating the Terminal Value
 Two basic methods used for computation of terminal value

Exit multiple basis (usually multiple of EBITDA – average of market related multiples )

Perpetuity basis assumes that the free cash flows of the business would grow to perpetuity at a marginal
steady rate
Terminal value =
FCF T+1
(WACC T+1 - g)
 Both methods should produce similar results as EBITDA multiple should capture the perpetuity
growth in value
 May differ on account of trading liquidity/ speculative forces/ market risk/ differential information
availability
 Terminal value cash flow should also truly reflect a “steady state”
10

The later years in the explicit forecasts should have reached a constant state of growth in cash flows

capex/ROCE assumptions in the terminal year cash flows should be realistic

Any non steady state assumptions used to derive the terminal year cash flow must be removed e.g. the
tax impact of any accumulated losses
Free Cash Flows : A Sample
(RS MILLION)
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
EBITDA
12,180
15,632
19,692
23,425
27,973
31,982
35,653
39,508
43,199
46,725
50,035
Less : Unlevered Tax
(488)
(709)
(2,205)
(4,775)
(5,911)
(6,823)
(7,549)
(8,287)
(8,919)
(9,434)
(10,230)
Less : capex
(8,366)
(9,745)
(11,198) (12,719) (13,805) (15,290)
Less : Working Cap Increase
(46)
627
700
821
825
944
1,093
1,186
1,260
1,348
1,400
FCF
3,280
5,805
6,988
6,752
9,082
10,814
11,406
12,839
14,207
15,137
16,230
(17,791) (19,568) (21,333) (23,503) (24,976)
(Rs Million)
18,000
16,000
14,207
14,000
10,814
10,000
5,805
6,000
2,000
55%
11,406
35%
9,082
8,000
4,000
16,230
12,839
35%
12,000
15,137
6,988
20%
6,752
13%
19%
3,280
11%
5%
7%
15%
7%
-3%
0
-5%
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
FCF
FCF Growth
Steady state CF
growth
11
Analysis of Publicly-Traded Comparable Companies
Selection Criteria for Comparable Companies
Primary Criteria
Secondary Criteria
 Business
 Margins / Operating Track Record
 Industry
 Location / Geographic Focus
 Products
 Ownership Profile / Liquidity
 Distribution Channels
 Leverage / Capital Structure
 Customers
 Dividend Yield / Payout
 Seasonality
 Cyclicality
 End Markets
 Size
 Growth History and Growth Prospects

Having determined a set of sample companies, multiples on parameters such as earnings, EBITDA
and book value are computed

The average multiple for each parameter considered is applied to the respective results of the target
company to arrive at a range of valuation
13
Analysis of Comparable Acquisition Transactions
Objectives of Comparisons of Acquisition Transactions

Measure “private” market value

Often a result of a combination of factors

Competitive bidding tension

Strategic value available – specific to individual buyers

Relative strength of target and buyer determined mainly by
–
Market position
–
Financial strength

Transactions may be structured as full auction, limited auction or bilateral negotiation

Privatisation transactions typically fall under full/ limited auctions

Methodology determined by

15

Need for transparency

Need for confidentiality

Universe of buyers

Complexity of transaction structuring
Enterprise Value may reflect not just the value of the target but also synergistic benefits available
to buyer through other transaction agreements such as brand rights, distribution sharing, noncompete etc.
Computation of multiples from “Acquisition” Comparables

Multiples to be computed based on financials available at the time of the transaction

Shares Outstanding for acquisition comparables consists of the fully diluted shares:

shares outstanding (as of the latest financials available); plus

shares pursuant to convertible securities (if in-the-money)

Offer Price Per Share = price per share offered by the acquiror. In the case of an offer that
includes stock, acquiror’s stock price one day prior to the announcement times the exchange
ratio should be used

Offer Value = offer price per share x shares outstanding

Enterprise Value = offer value + non-convertible debt + non-convertible preferred + minority
interest - cash & marketable securities
16
Sample Valuation Summary using the methods illustrated above
(US$ million)
1,000
900
800
700
625
650
630
600
655
500
500
400
465
460
300
200
260
335
355
100
EBITDA
Multiple
Method
Perpetual
Growth
Method
DCF
EBITDA
Trading
Multiples
EBITDA
Trading Multiples with 30%
Assumed Premium
Subscribers
Acquisition
Multiples
The various methodologies yield an indicative valuation range between US$ 450 mn to US$ 550 mn
17
Case Study : Valuation of a Telecom Company
Template used for a Telecom DCF valuation and benchmarking
Revenue assumptions
Cost assumptions
All India population
Opex assumptions
Penetration of total population
Capex assumptions
Market shares
DCF
Post paid and pre-paid
WACC of 13%
ARPU and MoUs
Perpetuity Growth
Projection Period of 11 years till FY 2016
Trading comparables

19
Transaction comparables
Pure play listed mobile comparables
not available in the Indian market

Recently concluded transactions
provide a framework of reference
 Bharti closest benchmark

Transaction comparables can be
distorted by strategic considerations

Control premia and bidding
environment need to be considered
Estimation of All India Population and Wireless Subscribers
Estimation of
Top Down Approach
1 Population and growth
Based on
Past trends and projections based on
estimates by Indian Census and
research reports
2
All India wireless penetration
Published industry research reports
by Gartner, Morgan Stanley,
Citigroup, Merrill Lynch and Lazard
estimates
3
Gross additions & churn
Lazard estimates of fair share of
gross adds in the respective circles
4 Pre-paid/post-paid split
Past trends and projections based on
Lazard estimates and Industry
research
Three separate cases have been considered for the purposes of valuation. In the “Base Case” all India
wireless penetration is assumed to reach 25% in FY 2016 with a CAGR of 17.8%
20
Key Assumption for ARPU and Key Costs
Key Assumptions For Estimating ARPU
Key Assumptions For Estimating Operating Costs
 Activation Fee per Gross Add : is assumed to decline
 Interconnect Pass Through Charges: is assumed
by 10% yoy
 Monthly Access/ Recharge Charge per Sub : is
assumed to decline by 5% yoy
 Outgoing Airtime rate : is assumed to decline by 5% in
FY 2006.
 VAS : is assumed to stabilise at 20% of voice revenues in
FY 2011; metro VAS assumed higher - stabilises at 30%
 Gross Outroaming : is projected to stabilise at 10% of
voice revenues by FY 2009
Key Assumptions For Estimating Capex
 Incremental capex is estimated at $ 75 per incremental
subscriber during the projection period
 Maintenance capex is estimated at $ 5 per opening
subscriber during the projection period
21
at 20% of gross revenue
 Network Operating Costs : have been estimated at
Rs 0.2 / min of usage
 License Fee : have been estimated at 10%, 8% & 6%
of net revenues for Metro, Circle A & Circle B
respectively
 Employee Costs: Cost per employee is assumed to
grow at 10% yoy
 Customer Acquisition Costs: have been assumed at
the FY 2005 levels of Rs 790 / postpaid gross add
and Rs 187/ prepaid gross add
 Advertisement Costs: have been increased to 7.0%
of net revenues in FY 2008 and thereafter remain
constant during the projection period
Key Outputs – Subs and ARPU
Total Company Subscribers
Total All India Subscribers
(Subs Millions)
(Subs Millions)
350
314
300
250
R
CAG
200
7
ss 1
irele
*
.8%
100
50
0
71
52
33
10%
12.3%
5%
6.4%
3.1%
4.8%
FY 2004
FY 2005
FY 2009
FY 2012
(Rs/Sub/Month)
620
600
500
400
300
602
425
270
2
Idea
R
CAG
11.2%
9.8%
20
375
5
4
5
252
248
FY 2005
Penetration
244

301
229
282
9%
FY 2006
FY 2009
0
FY 2005
FY 2006
FY 2009
Postpaid ARPU
* CAGR for the period FY 2005 – FY 2016
FY 2012
FY 2012
Prepaid ARPU
FY 2016
All India Marketshare
ARPU is projected to decline in line
Proportion of Prepaid subscribers is
projected to increase to 86.4% in the
terminal year
100
22
10%
with industry trends
200
FY 2004
10%
7
Idea Subscribers
524
239
11%
10.7%
8%
FY 2004
319
11%
0
553
12%
9%

357
24
14
10
13%
12%
12.2%
9.9%
15
FY 2016
563
*
0.2%
10.2%
Company’s ARPU
728
700
38
25
0%
FY 2006
All India Subscribers
800
35
15%
18.3%
150
25%
20%
W
142
40
30
25.0%
220
30%
(All India Marketshare)
FY 2016
Blended ARPU
Benchmarking With Industry Estimates
300
(Million Subs)
All India Subscribers
CAGR*
283
250
150
129
116
71
80 81 77 76
93
101100
152
125
117
Lazard
28.8%
Gartner
55.6%
Key outputs from the model
have
been
benchmarked
against research published by
199
200
100

142
leading
Gartner,
Morgan Stanley 42.8%
Citigroup
38.0%
Merrill Lynch
34.0%
houses
Morgan
such
as
Stanley,
Citigroup & Merrill Lynch
50
0
FY 2006
30%
FY 2007
FY 2008
24.8%
20%
The all India subscriber and
penetration projections are
All India Wireless Penetration
25%
lower than benchmarks
17.7%
15%
10%

FY 2009
11.6% 10.3%
7.3%
7.0%
8.3%
7.3%
6.8%
6.4%
8.9%8.8%
10.2%
13.2%
10.9%
12.3%
5%
0%
FY 2006
Lazard
23
FY 2007
Gartner
Morgan Stanley
FY 2008
Citigroup
FY 2009
Merrill Lynch
* Lazard – 4 year CAGR, Gartner – 4 year CAGR, Morgan Stanley/Merrill Lynch – 3 year CAGR, Citigroup – 2 year CAGR
Benchmarking With Industry Estimates
500
All India ARPU
(Rs/Month)
451
450
409
400
350

473
much lower than the comparables in
418
435
the initial 2 years of the projection
390
366
357
Overall ARPU in the “Base Case” is
340
period and thereafter follow the market
348
331 327 316
319
300
trend of steady de-growth
295

ARPU in the model is assumed to
reduce from Rs 375 / sub in FY 2005
250
to Rs 282 / sub in the terminal year
200
FY 2006
FY 2007
Lazard Gartner
FY 2008
Morgan Stanley
FY 2009
Citigroup Merrill Lynch

ARPU decline is on account of

All India ARPU Growth
0%
representing a CAGR of –2.6%
fees by 10% and 5% yoy
-2%
-4%
-6%
-8%
-10%
-12%
-4.8%
-5.6%
-7.6%
-10.5%
-2.6%
-3.6%
-4.7%
-10.6%
-10.9%
FY 2007
Gartner
Decrease in call charges
are assumed to behave
-9.2%
-10.6%
-9.8%
FY 2008
Morgan Stanley
Citigroup
inversely
charges
-12.6%
FY 2006
Lazard

– Minutes of Usage(MoUs)
-7.3%
-8.0%
-14%
24
Decline in Activation & Access
FY 2009
Merrill Lynch
with
the
call
ARPU & Key Components of ARPU
(Rs/Sub/Month)
800
ARPU
728
700
620
600
500
602
425
375
400
300
563
553
357
524
319
270
252
248
244
FY 2004
FY 2005
FY 2006
FY 2009
301
282
239
229
200
100
Breakup of ARPU
0
5%
7%
2% 5%
28%
7% 3%
7% 4%
29%
7%
28%
10%
4%2%
25%
FY 2016
Prepaid ARPU Blended ARPU
4% 1%
12%
21%
11%
4%1% 18%
15%
40%
13%
Activation Fee
25
6%
FY 2012
Postpaid ARPU
42%
11%
Recharge fees / Rental
42%
12%
Incoming Interconnect
45%
17%
14%
Outgoing Airtime
46%
VAS
49%
Gross Outroaming
Others
Costs
(% of Total Cost)
100%
90%
18%
80%
5%
6%
3%
9%
70%
60%
50%
40%
30%
9%
14%
14%
15%
14%
5%
6%
2%
9%
5%
6%
2%
11%
3%
5%
2%
2%
4%
2%
10%
9%
10%
15%
13%
10%
11%
9%
27%
28%
29%
14%
20%
10%
13%
10%
11%
34%
13%
8%
26
Network operation costs form the
largest chunk of the costs
accounting for 37% of the total
costs in FY 2016

Employee costs have been
assumed to grow to 20% of total
costs from the 11% in FY 2005

Advertisement and business
promotions costs are projected to
counteract increasing competition
in all the operating circles

Bad debts are projected to
decrease as a proportion of total
costs due to the increase in quality
of postpaid subscribers
13%
1%
3%
1%
12%
7%
5%
7%
14%
36%
20%
37%
0%
FY 2004
FY 2005
FY 2006
Network Operation Costs
Customer Acquisition Costs
Advertising and Business Promotions
General and Administrative Expenses
License Fee

FY 2009
FY 2012
Employee Costs
Customer Servicing Costs
Bad Debts
Corporate Expenses
FY 2016
Capex Assumptions & Projections
(Rs Millions)
(% of Gross Revenue)
30,000
30%
26%
24,976
25,000
20%
20,000
15,000
10,000
12,719
20%
17,791
18%
16%
8,366
15%
10%
5,000
5%
0
0%
FY 2006
FY 2009
Total Capex

25%
FY 2012
FY 2016
Capex % of Gross Revenue
Key Assumptions

Capex for incremental growth as well as maintenance of service quality/ enhancements have been estimated
on comparable benchmarks
27

Incremental capex is estimated at $ 75 per incremental subscriber in during the projection period

Maintenance capex is estimated at $ 5 per opening subscriber during the projection period
Projected Profit & Loss Account
FY 2005
(P)*
FY 2005
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
Postpaid Revenue
7,950
9,146
12,529
14,948
17,883
20,132
22,834
25,483
28,007
30,702
33,450
36,267
39,089
Prepaid Revenue
14,093
12,834
17,310
23,838
31,264
39,243
47,909
56,745
66,157
76,222
86,525
97,136 107,798
Inroaming and Other s
1,654
2,108
2,015
2,217
2,439
2,683
2,951
3,246
3,570
3,928
4,320
4,752
Gross Revenue
23,697
24,088
31,855
41,003
51,586
62,057
73,694
85,474
97,735
110,851 124,295 138,156 152,115
Net Revenue
19,536
19,766
25,887
33,246
41,756
50,182
59,545
69,029
78,902
89,466 100,300 111,475 122,737
34.2%
38.7%
31.0%
28.4%
25.6%
20.2%
18.7%
15.9%
14.3%
13.4%
(RS MILLION)
Revenue
Revenue Growth
Total Expenses
12.1%
11.1%
5,228
10.1%
(11,310) (11,022) (13,707) (17,614) (22,065) (26,757) (31,572) (37,046) (43,249) (49,958) (57,101) (64,750) (72,702)
EBITDA
8,226
8,744
12,180
15,632
19,692
23,425
27,973
31,982
35,653
39,508
43,199
46,725
50,035
53.2%
62.9%
39.3%
28.3%
26.0%
19.0%
19.4%
14.3%
11.5%
10.8%
9.3%
8.2%
7.1%
EBITDA Margin
34.7%
36.3%
38.2%
38.1%
38.2%
37.7%
38.0%
37.4%
36.5%
35.6%
34.8%
33.8%
32.9%
Depreciation & Ammort
(5,929)
(4,961)
(6,378)
(7,207)
(8,159)
(9,240) (10,413) (11,713) (13,225) (14,888) (16,702) (18,699) (19,643)
EBIT
2,297
3,783
5,802
8,425
11,533
14,185
17,560
20,270
22,428
24,620
26,497
28,026
30,392
Finance Costs
(4,147)
(3,367)
(3,560)
(3,385)
(3,001)
(2,433)
(1,779)
(1,175)
(809)
(619)
(428)
(237)
(105)
PBT
(1,718)
416
2,242
5,040
8,532
11,752
15,781
19,094
21,618
24,001
26,069
27,789
30,287
Tax
-
-
(189)
(424)
(718)
(1,447)
(5,312)
(6,427)
(7,277)
(8,079)
(8,775)
(9,354) (10,195)
PAT
(1,718)
416
2,053
4,616
7,814
10,305
10,469
12,667
14,342
15,922
17,294
18,435
EBITDA Growth
28
* Projected P&L for FY 2005 in the original model. PBT includes other income of Rs 131 million
20,092
Balance Sheet
(RS MILLION)
FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Sources of Funds
Equity Share Capital
Reserves
Accumulated Deficit
22,595
24,294
25,289
26,260
27,017
27,782
27,782
27,782
27,782
27,782
27,782
27,782
998
2,110
5,212
10,809
18,326
25,895
35,133
45,613
57,565
71,103
85,851 101,925
(19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209)
Preference Shares
4,830
5,361
5,951
6,606
7,332
8,139
9,034
7,140
2,700
-
-
-
Net Worth
9,214
12,556
17,244
24,465
33,466
42,607
52,740
61,326
68,838
79,677
94,425 110,499
Total Debt
36,920
35,612
32,835
27,953
21,611
15,037
9,657
7,616
5,576
3,536
1,495
717
Total Liabilities
46,134
48,168
50,079
52,418
55,076
57,643
62,397
68,943
74,414
83,212
95,920
111,216
Net Block
25,147
29,267
33,938
39,110
44,721
50,245
55,954
62,653
69,464
76,228
83,163
89,449
License / Entry Fee
10,724
9,771
8,818
7,865
6,912
5,959
5,005
4,052
3,099
2,146
1,193
240
-
-
-
-
-
-
2,121
5,193
7,171
12,598
21,850
33,214
Net Curent Assets
(1,528)
(1,482)
(2,110)
(2,810)
(3,631)
(4,456)
(5,400)
(6,493)
(7,679)
(8,939) (10,287) (11,687)
Goodwill
11,791
10,612
9,433
8,254
7,075
5,896
4,716
3,537
2,358
1,179
-
-
Total Assets
46,134
48,168
50,079
52,418
55,076
57,643
62,397
68,943
74,414
83,212
95,920
111,216
Application of Funds
Cash & Bank
29
Cash Flow
(RS MILLION)
FY 2006
FY 2007
FY 2008
FY 2009
FY 2010
FY 2011
FY 2012
FY 2013
FY 2014
FY 2015
FY 2016
PAT
2,053
4,616
7,814
10,305
10,469
12,667
14,342
15,922
17,294
18,435
20,092
Depreciation & Ammortisation
6,378
7,207
8,159
9,240
10,413
11,713
13,225
14,888
16,702
18,699
19,643
Gross Cash Accruals
8,432
11,823
15,972
19,545
20,882
24,380
27,567
30,810
33,996
37,134
39,736
Capex
(Increase)/Decrease in Working
Capital
(8,366)
(9,745)
(11,198)
(12,719)
(13,805)
(15,290)
(17,791)
(19,568)
(21,333)
(23,503)
(24,976)
(46)
627
700
821
825
944
1,093
1,186
1,260
1,348
1,400
Debt Repayment
(3,857)
(4,269)
(6,338)
(7,478)
(7,723)
(5,380)
(2,040)
(2,040)
(2,040)
(2,040)
(778)
Repayment of Pref Shares
-
-
-
-
-
-
(2,887)
(5,226)
(2,997)
-
-
Dividend & Dividend Tax
(411)
(923)
(1,563)
(2,061)
(2,094)
(2,533)
(2,868)
(3,184)
(3,459)
(3,687)
(4,018)
Gross Outflow
(12,680)
(14,310)
(18,399)
(21,437)
(22,797)
(22,259)
(24,494)
(28,833)
(28,569)
(27,882)
(28,372)
Current Period Cash
(4,248)
(2,488)
(2,426)
(1,892)
(1,914)
2,121
3,073
1,978
5,427
9,252
11,364
4,248
2,488
2,426
1,892
1,914
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
8,882
20,246
Cash Balance to Be Funded
Cash at the End of the Year
30
Free Cash Flows
(RS MILLION)
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010
FY 2011
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
EBITDA
12,180
15,632
19,692
23,425
27,973
31,982
35,653
39,508
43,199
46,725
50,035
Less : Unlevered Tax
(488)
(709)
(2,205)
(4,775)
(5,911)
(6,823)
(7,549)
(8,287)
(8,919)
(9,434)
(10,230)
(8,366)
(9,745)
(11,198)
(12,719)
(13,805)
(15,290)
(17,791)
(19,568)
(21,333)
(23,503)
(24,976)
(46)
627
700
821
825
944
1,093
1,186
1,260
1,348
1,400
3,280
5,805
6,988
6,752
9,082
10,814
11,406
12,839
14,207
15,137
16,230
Less : capex
Less : Working Cap Increase
FCF
(Rs Million)
18,000
16,000
14,207
14,000
10,814
10,000
5,805
6,000
2,000
55%
11,406
35%
9,082
8,000
4,000
16,230
12,839
35%
12,000
15,137
6,988
20%
6,752
13%
19%
3,280
11%
5%
7%
7%
15%
-3%
0
-5%
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
FCF
FCF Growth
Steady state
CF growth
31
Intrinsic Business Valuation for “Base Case”
Indicative Valuation
Lazard Model
Original
Model
Terminal Value / Terminal EBITDA
3.3x
4.5x
Valuation Multiples
“Base Case” Lazard
Model
Original Model
WACC
13%
14%
EV/EBITDA (Historic)
10.7x
14.1x
Perpetuity Growth Rate
3%
4%
EV/EBITDA (Forward)
7.7x
9.2x
Enterprise Value (EV)
2,072
1,682
EV/Subscriber (Historic) US$/Sub
409
452
928
873
EV/Subscriber (Forward) US$/Sub
295
279
Equity Value
1,144
809
Existing No of Shares (Millions)
2,260
2,260
Equity Value Per Share
Rs 23
Rs 16
Contribution of Terminal Value to EV
47%
51%
All Figures in US$ Millions
Net Debt (including Pref. Capital)
32
Valuation under Other Scenarios
 Valuation have been considered for two further scenarios - Pessimistic & Optimistic
 Pessimistic Scenario
– Terminal year all India wireless penetration 20% with a CAGR of wireless subscribers at 15.3% as compared
to a penetration of 25% in the Base scenario
– Perpetuity growth rate assumed at 2% as compared to 3% in the Base Scenario
– Resultant all India market share in FY 2016 is 11.5% as compared to 12.1% in the Base Scenario
 Optimistic Scenario
– Terminal year all India wireless penetration 30% with a CAGR of 19.8%
– Perpetuity growth rate assumed at 4%
– Resultant all India market share in FY 2016 is 12.8%
Equity Value Per Share
Enterprise Value
WACC 
12%
13%
12%
13%
14%
(Rs)
USD Million
33
WACC 
14%
Realistic
2,352
2,072
1,845
Realistic
28
23
18
Pessimistic
2,102
1,880
1,697
Pessimistic
23
19
15
Optimistic
2,738
2,362
2,066
Optimistic
36
29
23
Transaction and Trading comparable valuations
Benchmark Valuations in recent telecom transactions
SingTel’s stake enhancement in Bharti
Acquisition Consideration (USD Million)
Equity Value (USD Million)
Net Debt (USD Million)
Enterprise Value (USD Million)
Share of Cellular Business
EV of Cellular Business (USD Million)
Total Subscribers (April 2005) (Millions)
EV per Subscriber (USD/Subscriber)
Cellular EBITDA (FY 2005) (USD Millions)
EV/ FY05 EBITDA
35
Date
252
9,403
868
10,270
70%
7,189
11
631
435
16.5
Recent Transactions
Mar-04 Acquisition of Hexacom by Bharti
Jan-04 Acquisition of Escotel by Idea
Dec-04 Acquisition of RPG Chennai by Aircel
Average
EV/Sub (USD)
593
323
412
443
Wireless Trading Comparables
Trading Comparables
ENTERPRISE VALUE AS A MULTIPLE OF
COMPARABLE
PRICE /EPS
2005A
REVENUES
2006E
2005A
2006E
EBITDA
COMPANY
Year End
2005A
2006E
Bharti
March
33.7x
19.6x
5.9x
4.3x
16.5x
11.1x
Advanced Info
December
14.3x
13.4x
3.1x
3.0x
5.9x
China Mobile
March
14.6x
13.2x
3.1x
2.6x
5.7x
China Unicom
March
18.8x
18.4x
1.6x
1.5x
DiGi.com Bhd
March
12.4x
11.5x
1.7x
M1
December
13.9x
13.9x
2.9x
Maxis Comm
December
15.1x
13.8x
Telekom Malaysia
December
13.3x
Hutchison Telecom
December
Total Access
December
EBIT
2005A
2006E
2005A MARGINS
Gross EBITDA
EBIT
27.1x
17.1x
16.0%
35.6%
21.7%
5.6x
9.2x
8.7x
21.0%
53.0%
33.8%
4.9x
10.3x
8.7x
21.8%
54.1%
30.0%
3.7x
4.5x
16.3x
15.2x
5.9%
44.4%
10.0%
1.5x
3.8x
3.4x
7.6x
7.4x
14.2%
44.8%
22.8%
2.8x
7.5x
7.0x
11.5x
11.0x
20.5%
39.5%
25.7%
3.8x
3.5x
8.1x
6.3x
12.1x
9.0x
27.0%
46.3%
31.1%
17.3x
2.7x
2.6x
5.8x
5.4x
14.0x
11.9x
19.5%
47.0%
19.6%
0.0x
0.0x
3.3x
2.0x
15.7x
0.0x
519.2x
0.0x
0.0%
21.1%
0.6%
0.3x
0.3x
0.9x
0.8x
2.4x
2.2x
4.1x
3.6x
11.3%
38.4%
22.2%
MEDIAN
14.1x
13.8x
3.0x
2.6x
5.9x
5.1x
11.8x
8.9x
17.8%
44.6%
22.5%
MEAN
13.7x
14.8x
2.9x
2.5x
7.5x
5.1x
63.1x
9.3x
15.7%
42.4%
21.8%
HIGH
33.7x
19.6x
5.9x
4.3x
16.5x
11.1x
519.2x
17.1x
27.0%
54.1%
33.8%
0.0x
11.5x
0.9x
0.8x
2.4x
0.0x
4.1x
0.0x
0.0%
21.1%
0.6%
LOW
NOTES:
Figures have been adjusted to exclude unusual and nonrecurring items.
Stock prices and historical financial statements reflect publicly available information as of 24 June 2005
SOURCES:
36
estimates from I/B/E/S.
Benchmarking with Trading and Transaction Comps
All Figures in Rs Million
I
Lazard Model
II.
Value Based On
37
Enterprise
Value (EV)
EV/Sub
(US$)
EV/EBITDA
(historic)
Price Per
Share* (Rs)
2072
409
10.7x
22.8
a.
Historical Transaction EV/Sub Multiples (Idea-Escotel
Jan'04, Bharti-Hexacom Mar'04, Aircel-RPG Dec'04)
2259
443
11.4x
26.5
b.
Implied FY'05 EV/EBITDA Multiple for Increase in
Singtel's Stake In Bharti in May 2005
3164
620
15.9x
44.5
c.
Bharti FY'05 EV/EBITDA Trading Multiples
3283
644
16.5x
46.9
* Prices based on existing capital base
In Summary ...
 Valuations are more about rigour in implementing the concepts than about concepts
 Every valuation is different
 Industry to industry
 Company to company
 Of a company at different times
 Though a thorough understanding of concepts is important to use them in different scenarios
 Different growth parameters – how to use them?
 Tax issues
 Carry forward losses and their treatment
 Split period approaches
 Terminal Value impact
 A thorough understanding of the industry, company, environment around it is very important
 And lastly, an excellent hold over spreadsheet is critical …
 Makes the difference between a good valuation and a not so good one …
Thank You
38