abcd - business valuation report a b c d private limited business valuation report august 2007...

ABCD - Business Valuation Report

A B C D Private LimitedA B C D Private Limited

Business Valuation Report

August 2007

Confidential

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


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


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


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


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 2007.

• ABCD have furnished to XYZ its past financials and the management accounts as at 31 st March 2007.

• 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


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


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 company’s present business environment.

9


Valuation Methods

Net Asset Value Price Earning Capacity Discounted Cash Flows (FCFE)**

Reckons with assets and liabilities carried Past performance given due importance Cash Flow available to stakeholders estimated from projected income statement and Balance Sheet for certain years until business stabilize.

Assets marked to market wherever applicable Post tax earnings capitalised at specified percentage Discount 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 computation Weighted 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 circumstances COEC 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


Guidelines of Controller of Capital Issues (CCI)

Highlights of CCI’s Guidelines in valuation of Equity Shares of Companies

Net Asset Value Price Earning Capacity Value

Intangible assets to be ignored Net 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 capitalised @15% 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


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 31st 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 company’s 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 Company’s 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


Valuation Methodology

Net Asset ValueNet Asset Value

Based on March 2007 management accounts (unaudited)Based on March 2007 management accounts (unaudited)

Profit Earning CapacityProfit 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


Business Value

Equity Share ValueEquity Share Value

Net Assets Value Method Net Assets Value Method

Subject under valuationSubject under valuation

WEIGHTED VALUE PER SHARE Rs 117

Rs 133 Rs 133

60 : 40 60 : 40 Adduced WeightsAdduced Weights

Basis of AscertainmentBasis of Ascertainment

Profit Earning Capacity Method Profit Earning Capacity Method Rs 94 Rs 94

14

ABCD - Business Valuation ReportMajor Assumptions

1 The Chinese syndrome in Indian textiles market would inhibit growth of players.

2 In 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.

3 Though 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.

4 Nevertheless, the PECV based approach is adopted with lesser weightage to be in tune with the sentiments in the market.

5 NAV 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 ReportHistorical Balance SheetHistorical Balance Sheet

2007(1Qr) 2006 2005 2004 2003

Sources of Funds:

Shareholders’ Funs

Share Capital 88001 88001 314422 419222 558722

Reserves and Surplus 1214000 1040538 1796112 2252738 3389448

Loan Funds 9000 21250 12000 11769 9080

1311001 1149789 2122534 2683729 3958250

Application of Funds:

Gross Block 3629894 3298232 2920810 2959540

Less: Depreciation 2278582 2186594 2025909 1885920

Net Block 1560001 1351312 1111638 964910 1073620

Capital Work-in-progress 0 195568 83408 81567 12954

Investments 115000 583923 296211 2884633 1994355

Deferred tax assets 0 4000 7000 22000 36000

Current assets, loans and advance

3565000 3389157 2952179 2562944 2923056

Less: Current liabilities 3929000 4374171 2327902 3832316 2082735

Net Current Assets (364000) (985014) 624277 (1269362) 840321

1311001 1149789 2122534 2683729 3958250

Rs in ‘000sAppendix -1

16

ABCD - Business Valuation ReportPast PerformancePast Performance

FY06 FY05 FY04 FY03

Income:

Sales less Excise Duty 8226643 7241498 6204304 6306462

Other income (including interest income) 759652 155950 850821 146868

Total Income 8986295 7398448 7055125 6453330

Expenditure:

Raw materials consumed 3221308 2647605 2054874 2146533

Purchases for resale 279449 271841 253241 287156

Sales tax 285790 250540 236756 242526

Depreciation 198923 182415 181111 186108

Other expenses 3558918 3320689 2948760 3001403

Interest 466 - - -

FG/WIP movement (236402) (79230) 105398 (973)

Total Expenditure 7308452 6593860 5780140 5862753

Profit before taxation 1677843 803588 1274985 590577

Taxes-Current 501179 218143 270000 230483

- Deferred 3000 15000 14000 (36000)

-FBT 14750 9000 - -

Profit after tax &before extraordinary items 1158914 561445 990985 396094

Surplus Brought forward 457 341 832638 354845

Extraordinary items [debit/(credit) ] 394849 6341 165498 148500

Dividend (including tax) - 510891 1874708 66801

Transfer to General Reserve 123280 56779 114087 -

Balance Carried to Balance Sheet 644340 457 341 832638

Rs in ’000s Appendix-2

17

ABCD - Business Valuation ReportBalance Sheet as at 31.3 2007Balance Sheet as at 31.3 2007

Share Holder’s Funds

Share Capital 88000

Reserves and Surplus 1214000

Loan Funds:

Secured Loans 0

Unsecured Loans 9000

Total 1311000

Application of Funds:

Net Block of Assets 1560000

Investments 115000

Current Assets and Loans & Advances 3565000

Less: Current Liabilities 3929000

Total 1311000

Rs in 000’s Appendix-3Appendix-3

18


Particulars

Sales 1982000

Profit before Interest, Depreciation & Taxes (PBIT) 248000

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 31st March 2007

Rs in 000’sAppendix -4

19

ABCD - Business Valuation ReportNet Asset Value WorkingNet Asset Value Working

Particulars Book Value as at 31.03.2007

Adjustments Value

Net Fixed Assets 1560000 - 1560000

Investments 115000 - 115000

Current Assets:

Inventories 1386000 - 1386000

Receivables 1353000 - 1353000

Loans& Advances 512000 - 512000

Cash &Bank balances 314000 - 314000

Total Assets 5240000 0 5240000

Less:

Current Liabilities 3929000 - 3929000

Loan Funds 9000 - 9000

Contingent Liabilities 0 133674 133674

Total Liabilities 3938000 133674 4071674

Net Assets 1168326

Equity Shares Outstanding (Nos)

8800100

Value Per Share 132.76

Rs in ‘000sAppendix -5Appendix -5

20

ABCD - Business Valuation ReportPrice Earning Capacity Value WorkingPrice Earning Capacity Value Working

Particulars Weighted Profits

Average Profits before tax 802,127

Provision for tax 320,497

Average profit after tax 481,629

No of equity shares outstanding (Average) ( Nos) 34074578

Earning per share ( Rs) 14.13

PECV@ 15% Capitalisation of average profits after tax ( Rs) 94.23

Appendix 6Appendix 6 Rs in ooo’s

21

ABCD - Business Valuation ReportPrice Earning Capacity Value (Basic Data)

Price Earning Capacity Value (Basic Data)

Year/ period ended Profit before tax Normalised Profit

before tax

Normalised Profit

after tax

Share

Capital

Number of

shares O/s

(Nos)

31.12 2003 590577 500742 306259 558722 55872211

31.12 2004 1274985 534604 250604 419222 41922211

31.12 2005 803588 760164 518021 314422 31442211

31.12 2006 1677843 1060365 541436 88001 8800100

31.03. 2007 ** 980000 788000 500000 88001 8800100

Rs in ‘000s

** Annualised profit

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 2007. 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.

abcd - business valuation report a b c d private limited business valuation report august 2007...

Documents