OTHERS
| Investor interest will revive if tax regime uncertainty is addressed: Varun Gupta Mon, 10 Sep 2012 00:57:00 +0530 |
| Business Standard Economy Policy News American Appraisal, the US firm engaged in valuation-related advisory services, is into merger & acquisition, taxation, corporate re-structuring and even family disputes. Having begun Indian operations four years earlier, it has done about 300 engagements so far, serving about 100 clients. Varun Gupta, managing director of the India arm, speaks to Reghu Balakrishnan on valuation mismatches and other issues in the Indian deal space. Edited excerpts: In each deal, a major concern is valuation mismatch. What is the reality in India? There is a perception that valuations in India have been high. Justified to some extent because of the high growth rates one can expect in the future. So, once the current uncertainty around the tax regime is addressed, the investor interest in India will revive. There are very few markets globally that offer the sheer size and growth that India does. What is the significant change you have seen in India in the past four years? We observed that 2007 was the peak in terms of what the capital markets and investors were valuing India Inc. A lot of promoters continue to believe in the valuations they had seen in 2007. Our capital markets have gone down to much lower levels. Promoter expectations have not gone down that much. So, the gap between the expectations of private promoters and the capital market multiples has widened. People continue to believe their businesses are worth more than what the capital markets might be suggesting right now. A few private equity transactions did happen at very high valuations in the e-commerce space? It might not be appropriate to comment on specific deals but one must remember that the level of e-commerce today was not anticipated five years earlier. I think substantially all commerce will eventually become e-commerce. Yes, there will be some failures. But given that the future belongs to e-commerce, it might not be irrational exuberance on the part of investors to have picked up stake in companies at what appear to be high valuations right now. Cases of companies such as Subhiksha in retail space? As valuers, we rely on the audited accounts provided to us. In such cases, somebody like a forensic service provider would be able to help. In many cases, the promoters are not revealing the whole detail? If the investors have reason to believe they are not getting the complete information from the promoter, they will either walk away from the deal or increase their risk premium while evaluating the company. Which is the popular method of valuing a company? There are three basic approaches – the income approach, the market approach and the cost approach. Each of these has different variants, each with its own advantages and limitations. To the extent possible, we rely on multiple approaches to value a company, instead of relying on a single approach. Example? If you talk about an internet company, its value not only depends upon how the economy will grow but also on how the penetration of internet will grow. You also have to take into account the market share the subject company will be able to get, compared to its competitors. You need to estimate the operating expenses, the capital expenditure, as well as the working capital requirements. All these factors affect future cash flow. You also have to determine the discount rate, which depends on how risky the company is. This discount rate is used to determine the present value of the future cash flows. All other things being equal, the higher the discount rate, the lower the value. This is known as the discounted cash flow method. Other methods? The other popular approach is the market approach. In this, we look at comparable companies. We analyse the revenue, earnings and other multiples these comparable companies are trading at and then we apply similar multiples to the subject company. But those multiples need to be adjusted for the specific facts and circumstances of the subject company. For example a fast growing company will attract a higher multiple than other companies in the same industry if they are not showing the same rate of growth. In the current scenario the risk factor is more, so are any additional parameters are added to the valuation process? The basic framework remains the same. But when we estimate the discount rate, one of the key determinants of value, we consider a lot of factors, including the regulatory environment. If the environment is uncertain, the investors increase the discount rate. If there is economic uncertainty, then the growth rate of the future cash flows is also adjusted a little. |
Online Poll