PRIVATE EQUITY: VALUATION OF DEALS

1. PRIVATE EQUITY: VALUATION OF DEALS Presentation By: CA, Navjeet Singh Sobti Executive Vice-Chairman Almondz Global Securities Limited PRIVATE EQUITY: INDIA’S GROWTH CATALYST Organized jointly by: Committee on Financial Markets & Investor Protection of ICAI & NIRC - ICAI HARYANA, APRIL 06, 2008

2. VALUATION CONCEPTS TOPICS COVERED APPROACHES TO COMPANY & BUSINESS VALUATION SAMPLE CASE STUDIES

3. VALUATION CONCEPTS

4. Valuations provide useful baseline to establish a value for a business as on today or a forecasted period • It serves as an alternate - to the role that major stock exchanges play for public companies - for small/unlisted companies • Assists in arriving at exit strategies for the Existing Owner & Prospective Financial/Strategic Investor to obtain value for their stake in the companies when they desire to sell ABOUT VALUATIONS

5. Valuation of Large Public-Listed Companies • Actual Stock Price on Exchanges - function of supply-demand and investor preferences • Analysts’ Estimates • They typically fall within a reasonable band In India, most investment opportunities are in companies that lie between these two extremes • Companies are often privately-held • Project rapid growth • Future performance subject to high degree of variability • Simpler Valuation Process • Derived from Capital the Company needs & % stake expected by VCs Early Stage Investing THE ESSENCE OF VALUATION

6. Unless the seller has established a UNIQUE & SCALEABLE BUSINESS MODEL, it's not likely that an informed purchaser will pay a substantial premium; however, for the seller who has positioned the business properly, the rewards can be substantial. YES NO Is Derived Valuation > Expected Value ? VALUATION UNCOVERS WORTH OF MANAGEMENT THE UNDERLYING PRINCIPLE Opportunity for Business Owner to work towards increasing Value of the Company Might be an Opportune time to sell

7. APPROACHES TO COMPANY & BUSINESS VALUATION

8. INCOME BASED APPROACH • Discounted Cash Flows • Dividend Discount Model ASSET BASED APPROACH • Net Asset Valuation MARKET APPROACH • Relative Valuation using Multiples APPROACHES TO VALUATION

9. Free Cash Flows to Equity discounted at Cost of Equity i.e. Ke* INCOME BASED APPROACH DISCOUNTED CASH FLOWS • ISSUES • Easily Manipulated • Not Directly Linked to Market • Forecast Revenues & Costs – a Challenge • Not Ideal Method for valuing Firms with trouble, under-utilized assets * Ke is calculated using Capital Asset Pricing Model (CAPM) adjusted for Small Company Premium & Specific Company Risk Premium if any

10. INCOME BASED APPROACH Contd…. • ISSUES • Applicable to limited number of companies • Undervalues Companies that pays no or less dividends • Investors, besides dividend also look for capital appreciation • For Academic Purposes Only

11. ASSET BASED APPROACH • ISSUES • Limited Applicability for Operating Entities • Not used when investments are financial in nature

12. RELATIVE VALUATION • ISSUES • Difficulty in finding similar Listed Companies/ PE/ M&A transactions

13. Final Valuation is a Derivative of Mathematical Weights applied to various approaches & Professional Judgment • Both methods involve subjectivity • Final Valuation should prove the test of Common Sense & Reasonableness • Last but not the least, parties concerned Negotiate hard on arriving at a Value of the Company but the call is largely a gut feel valuation by the investor REACHING A CONCLUSION ON VALUATION

14. Duration of Private Equity/ Venture Capital Investment normally ranges from 3-7 years EXIT OPTIONS • IPOs • Mergers & Acquisitions • Management Buy-out • Sale to Another Fund • Buyback by Promoter/ Company • Stock Market EXIT OPTIONS AVAILABLE TO PRIVATE EQUITY FUNDS In case of Buyback by Promoter/Company , the value at which PE Fund would exit is IRR or market-based and is pre decided at the time of investment on a certain valuation

15. SAMPLE CASE STUDIES

16. About the Company Comments • Initially, with a 2-digit topline & 140 stores, intended to come out with an IPO for INR 500 million for fund requirement to Scale-up the number of Stores • Taking into account the Capability of Management, Scalability of the business vis-à-vis requirement of funds, the Company was advised to Hold the IPO plans • Advised to go for Private Equity in phased manner for better valuations for each fund raising • Inherent Business Strengths: Own manufacturing unit, sourcing from China, Economies of scale, Exclusive Business Outlets on Franchisee basis • Business scalability projected for each year hence was achieved in a quarter; thus resulting in growth in stores from 140 to 1,000 & Valuation from INR 3,750mn to six times in one year SAMPLE CASE STUDY I A Retail Garment Chain with pan-India presence

17. About the Company Comments • Raised Funds to the tune INR4,400mn via Private Equity Route to fund acquisition of more Hospitals in phases • Peculiarity in terms of raising comparatively higher money for lesser dilution on a future multiple • Leveraged the advantages of funds flow from “Real Estate” owned by the Hospital to make it Debt-free in 2 years • Thus, enabling the company to embark on capital intensive, long gestation projects with assured funds supply when needed SAMPLE CASE STUDY II A South India based Hospital Chain

18. VALUATION IS TEMPORARY BUT CONTROL IS FOREVER THANK YOU