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Archive for the ‘Valuation’ Category

How to value angel investments

Posted by fairval on July 13, 2016

My column in Hindu Businessline this Monday focussed on the issue of – how to value an angel deal.

In short – there is no method really to value angel deals. Most investors use absolute numbers within a certain range to invest, without necessarily linking them to business numbers.

For example, Silicon valley entity Y Combinator, which is more of a accelerator than an angel, has a specific, one size fits all formula. It invests $120K for 7% stake, which means it values the startup at $1.71m post money. This is roughly about Rs 10 crore pre money.

Some Indian startup funds seem to follow this also. India Quotient invested Rs 2 crore in one company I know at Rs 10 crore pre-money. Don’t know whether it is their standard formula.

Most HNIs though tend to be stingy. They like to stay in single digits in pre money valuations.

Instead of a flat valuation, it is possible to do a bit of structuring, like discount to Series A. Or take a metric like orders processed, and link valuation levels to few pre-defined ranges of orders processed. These kind of investments will need a cap/floor ideally. Some investors don’t like to keep such metrics for valuations, since it can skew management focus.





Posted in Angel Investing, The Science of Investing, Valuation | Tagged: , , , , | Leave a Comment »

Adlabs Entertainment – The Most Expensive IPO EVER?

Posted by fairval on March 16, 2015

Manmohan Shetty owned Adlab Entertainment’s IPO is amazingly expensive, even by the standards of the Media and Entertainment industry, where good stocks do tend to quote at a premium.

Consider this:

  • The company has just 18 month of operating history
  • Still making cash losses. In Apr-Sep’14, it reported a cash loss of Rs 50 crore! This is about 70pc of revenue
  • No debt rating reported after Jan’14, which is suprising given that it has over Rs 1200 crore of debt.
  • Probably needs to double revenue just to break even. Its ticket price is already more than 2x of other game parks. May find it hard to raise ticket prices too much. High ticket prices could limit foot falls too.
  • Hard to see double digit ROCE.

It is asking for EV/Sales of over 20x. The issue’s last date is tomorrow. Lets see if it closes. The retail portion seems to be subscribed

Posted in IPO, Valuation | Tagged: , | Leave a Comment »

Flipkart is the 39th most valuable company in India

Posted by fairval on November 24, 2014

The latest round of fund guzzling at Flipkart seems to have been done at a valuation of $10B. That makes it amongst the top 40 most valuable companies in India.

The following is the list of most valued companies as per market cap (all listed cos here, safe to assume there no company in the unlisted space with $10 B valuation). So Flipkart is being valued almost the same as Dr Reddy, Hero Motor, GAIL, Nestle India. In the consumer space, it is getting more valuation than companies like Dabur, Godrej Consumer, Marico, Colgate etc.

Flipkart’s valuations are 2x more than Titan, the largest brick and mortar retailing company!


India's Most Valuable Companies

India’s Most Valuable Companies


Posted in E-commerce, Valuation, What was that Again? | Tagged: , , , , , , , , | Leave a Comment »

The magic of e-commerce – I

Posted by fairval on September 25, 2014

While Flipkart story is well known, there are possibly dozens of examples in e-commerce where young start-ups have raised astounding amounts of money.

Our research affiliate India Business Reports was checking out Urban Ladder, which is a online furniture retailer, or a niche vertical player (Flipkart is a horizontal, present in several categories). Check some numbers about this:

  • Incorporated in early 2012
  • FY13 was the first financial year, where sales was Rs 2 crore
  • Promoters in early ‘30s. IIT-IIM types, but experience in this domain – Zero.
  • Has already raised 3 rounds of funding aggregative Rs 145 crore.

See how valuations have progressed (pre-money). Kindly note these numbers are IBR estimates, could be somewhat off the mark.

Valuations in successive rounds

Valuations in successive rounds

We don’t know FY14 revenue. But it seems aims to cross Rs 100 crore revenue in FY15. While the ramp up is commendable, it is backed by considerable money. And the company will probably be profitable in FY18.

Which other business is there where you can raise so much money so fast, and yet plan to make EBITDA losses for a few years more. Between Oct’13 and Jun’14 is 8 months, and the pre-money valuation seems to have increased 5.6x!

Posted in E-commerce, PE/VC, Valuation | Tagged: , , , , | 1 Comment »

Impossibility of predicting earnings

Posted by fairval on January 2, 2014

The interesting thing to note in this chart below is how earnings estimate change over time. For FY14, for example, the EPS estimate (for msci india index) started at 435 and seems set to end at 395, down by almost 10%. FY13 was even worse, with estimates coming down by 16% over time.


Actual earnings growth was 6-8% FY13 and likely to be less than 10% in FY14 again. While FY15 estimates seem to suggest 17% growth over FY14, these numbers should come down over time. As this blog has written earlier, earnings estimates a year ahead mean nothing, and tend to be in the 18-20% bracket by default. They may eventually turn out vastly different, going up in bull markets and coming down in bear markets. Seems to suggest estimating earnings is an almost impossible task.

Posted in Data, Trends, Valuation | Tagged: , , , | Leave a Comment »

Just Dial now 3rd most valuable media co, moves up a rank

Posted by fairval on December 10, 2013

Came across a broker report with a target price of (hold your breath) Rs 1500 for Just Dial. To put this in context, in May’13 when the IPO came, the offer price was Rs 530, and it wasn’t a cheap IPO at over 50x trailing PE. However, the prevailing view at that time, correctly, was that it was worth a Buy at that price. Just Dial now quotes at a PE of 120x FY13 and over 75x FY14 expected eps.

This blog had in a post on 25 June pointed out how Just Dial was the 4th most valuable media co. Well now, it is the 3rd. In June, it was less than 30% of Sun’s market cap, now the gap is less than half. The brokers’ target price will take Just Dial’s M cap to Rs 10,000 crore, or just 32% less than Sun TV. Sun, btw, makes more net profit than Just Dial’s revenue.

While most other media rankings are unchanged, the other big mover is Info Edge, which has gained over 40%, and is now the 5th most valuable stock, ahead of DB Corp, Jagran, Just Dial has just launched a transaction service, which facilitates order completion, it seems this is a direct competition to Info Edge’s subsidiary Zomato. Interesting times ahead!


Posted in Media and entertainment, Valuation | Tagged: , , , , , | Leave a Comment »

Just Dial is now the 4th most valuable media stock in India

Posted by fairval on June 25, 2013

Just Dial seems to have done well since listing. Having gained over 15% from the IPO price, it is now ranked 4 amongst Indian media stocks. This makes it more valuable than all listed print stocks, radio stocks, and behind only 3 stocks – 2 TV broadcasters cum distributors, and one pure TV distributor (DTH co).


It also seems to have decisively left behind Info Edge, the other classified advertising company, which is still struggling to grow beyond recruitments.

Just Dial is tho now perhaps the most expensive stock on Indian stock markets, quoting at over 60x trailing. It needs to grow earnings at >50% CAGR for shareholders to make returns from these price levels.

Posted in IPO, Media and entertainment, Valuation | Tagged: , , , | Leave a Comment »

A new example of analyst creativity

Posted by fairval on February 15, 2013

What share prices move sharply, either up or down, it does create a problem for the analyst if there is a reco and target price out. Adani Ports  seems to created some problems recently, as we found from this report. The stock rose 20% in 2 weeks.

This leading foreign broker seems to have been caught in a bind. They appeared to have have used DCF for their earlier target price of Rs 149. Now this was set on 27 Jan 2013, when the closing market price was Rs 130.60. I haven’t read this report, so dont know if the sale of Abbot Coal was covered in it or not (unlikely). The company announced on Jan 28, that it would divest almost the entire stake in Australia’s Abbot Point Coal Terminal to the Adani family. The market seems to have liked this, and the stock jumped 20% in less than 2 weeks, reaching Rs 156 on Feb 8.

As you well know, it is a little hard to justify tinkering around with DCF in 8-10 days. So either you put a Sell, or neutral, or you have to figure out a way to increase the target price, and retain you buy call. This analyst has gone for the latter, with what one must admit, some real creative flexibility.


Reiterate Buy — Despite the stock’s sharp rise (+20% in ~2 weeks) after the 28 Jan 2013 announcement of a sale of Abbot Point to the Adani Family, we believe
there is scope for further rerating based on the underlying business momentum, potential deleveraging and forecast improvements in RoE and RoCE

Increasing target price to Rs183 from Rs149 — We now use a blend of 50% DCF value (Rs151) and 50% EV/EBITDA value (Rs216), from 100% DCF earlier. In our view, the 50-50% mix of DCF and EV/EBITDA better captures the long-term nature of the port’s cash flow and near-term strong earnings growth. The 15x EV/EBITDA we use for our TP is supported by a 19% EBITDA CAGR over FY13-15E and 11% RoCE, and is at a 30% discount to the historical average.

Posted in Anal(yst) Humour, Valuation, What was that Again? | Tagged: , , , | 2 Comments »

A new method to calculate relative PE

Posted by fairval on January 17, 2013

When analysts make their price targets, what PE to use (this being the most common metric) is often quite arbitrary. We have used the following method in a recent report. This is a report on Sona, an auto ancillary. About 45% of its sales are to Maruti, so i decided to derive its PE in relation to Maruti.

Sona should clearly trade at a discount to Maruti, but how much? To give a method to this, we compared cumulative profits over last 10 years. This should be a long enough period to arrive at a assessment of relative profit generating (and therefore wealth creation) abilities of the two businesses.

Here is what we got. FY03 is indexed to 100. Adding up profits, Maruti made about 3x the net profit as compared to Sona. (This is not an absolute number, but an indexed number).  It seems fair to say that Maruti’s PE should be 3x Sona. Brokers currently value Maruti at around 18x FY14. Sona could well get 6x FY14.

If this were true, Sona appears a good buy at current price. And with 5% dividend yield currently, downside is protected.

A metric for relative PE calculation

Posted in Auto, Stock Ideas, The Science of Investing, Valuation | Tagged: , , , | Leave a Comment »

Target price using PEG greater than 1

Posted by fairval on November 3, 2012

I guess when a stock commands high P/E, every once in a while comes a time when it becomes hard to explain the valuation. This is from a report on Titan by a foreign broker. They have used a PEG of 1.2 to arrive at a target price! There is always a first time.

We roll forward our target price time frame to Sep’13 with a revised TP of Rs244 (earlier Mar’13 TP of Rs205). Our PT is based on PEG of 1.2x implying 30x FY13 P/E and 24x FY14 P/E. Our target PEG ratio is at the higher end of the 1.0-1.2x PEG ratio we use to value regional retail companies because of Titan’s better return and growth profile.

Posted in Valuation, What was that Again? | Tagged: , , , | 2 Comments »