DCF Final

DCF Final

• 1.
  DISCOUNTED CASH FLOW METHOD VIJAYARAGAVANN
• 2.
  Valuation Purpose of Valuation VariousApproaches DCF method
• 3.
   Estimation Process- worth of an object/instrument Examples:  Bike sale - Hero Honda Vs Bajaj  Real Estate - ECR beach side Vs Non beach  Valuation of Asset - fire sale Vs normal sale
• 4.
   Sale ofshares by a person to another.  Merger of two or more companies  Absorption - capital restructuring  Tax Purposes  Acquisition/ transfer of shares in an Indian company by a non-resident  Ascertainment of the premium at which shares are to be issued
• 5.
  • DCF • MaintainableProfits • Dividend Discount INCOME BASED • Comparable • Transaction based • Prior Sale of Biz. based MARKET BASED • Asset liabilities valuation NET ASSETS BASED
• 6.
   Based onFree Cash Flows and riskiness of capital  Valuation based on a. Cash Flow Projections b. Discount Rate c. Terminal Value
• 7.
   Growth prospects& Earnings Capacity  Discontinuation of biz  Expansion of capacity  Turnaround Cases  Entire Biz Cycle  Consideration – Policy change  Operating Leverage – Utilization Capacity  Product Mix  Financing Policy  Capex  Expansion Capex  Maintenance Capex  Income Tax
• 8.
   CAPM Method Leveraged Entity  Weighted Average Cost of Capital (WACC)  Deleveraged Entity  Cost of Equity
• 9.
   Equivalent toliquidation/sale value  Value of CF after forecast period  Methods - Perpetual Growth & Multiple Approach
• 10.
  Step 1. Projectfree cash flow for the forecast period Step 2. Determine a discount rate Step 3. Discount the projected free cash flows to the present and sum Step 4. Calculate the perpetuity value and discount it to the present Step 5. Add the values from Steps 3 and 4, and divide the sum by shares outstanding
• 11.
  DCF Model Parameters Value/detail Salesgrowth rate YoY 10% Current Assets 35% of the sales Current Liabilities 15% of the sales Cost of Goods Sold 70% of the sales Tax rate 35% Dividend Payout ratio 40% of the PAT Gross Fixed Assets to Sale 0.48 Interest Rate on Debt 9% Debt Pricipal Repament 2,000,000 per year at the end of FY Projection Period 5 years Equity shares outstanding (FV - Rs.10) 100,000 Other Income 4% YoY
• 12.
  Dream Engineers Ltd Incomestatement: Amount in ` Year 0 1 2 3 4 5 1 Sales 25,000,000 27,500,000 30,250,000 33,275,000 36,602,500 40,262,750 2 Cost of Goods Sold 19,250,000 21,175,000 23,292,500 25,621,750 28,183,925 3 Profit/(loss) before Other income, Interest, depreciation & Taxes 8,250,000 9,075,000 9,982,500 10,980,750 12,078,825 4 Other Income 20,000 20,800 21,632 22,497 23,397 5 Profit/(loss) before Interest, depreciation & Taxes 8,270,000 9,095,800 10,004,132 11,003,247 12,102,222 6 Depreciation 3,000,000 3,300,000 3,630,000 3,993,000 1,392,300 7 Interest on Debts 810,000 702,900 586,161 458,915 320,218 8 Profit/(loss) before Taxes 4,460,000 5,092,900 5,787,971 6,551,332 10,389,704 9 Tax @ 35% 1,561,000 1,782,515 2,025,790 2,292,966 3,636,397 10 Profit/(loss) after Taxes 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308 11 Dividend @ 40% 1,159,600 1,324,154 1,504,872 1,703,346 2,701,323 12 Retained earnings 1,739,400 1,986,231 2,257,309 2,555,019 4,051,985
• 13.
  Balance Sheet: Amountin ` Year 0 1 2 3 4 5 Cash 500,000 149,400 2,598,531 5,378,001 5,521,536 6,936,298 Current Assets 6,250,000 9,625,000 10,587,500 11,646,250 12,810,875 14,091,963 Fixed Assets Cost 12,000,000 13,200,000 14,520,000 15,972,000 17,569,200 19,326,120 Depreciation (3,000,000) (6,300,000) (9,930,000) (13,923,000) (15,315,300) (16,846,830) Net Fixed Assets 9,000,000 6,900,000 4,590,000 2,049,000 2,253,900 2,479,290 Total Assets 15,750,000 16,674,400 17,776,031 19,073,251 20,586,311 23,507,551 Current Liabilities 3,750,000 4,125,000 4,537,500 4,991,250 5,490,375 6,039,413 Long Term Borrowings 9,000,000 7,810,000 6,512,900 5,099,061 3,557,976 1,878,194 Share Capital 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 Retained earnings 2,000,000 3,739,400 5,725,631 7,982,940 10,537,959 14,589,944 Total Liabilities & Equity 15,750,000 16,674,400 17,776,031 19,073,251 20,586,311 23,507,551
• 14.
  Free Cash Flow(FCF) Computation: Amount in ` Year 0 1 2 3 4 5 PAT 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308 Add: Depreciation 3,300,000 3,630,000 3,993,000 1,392,300 1,531,530 Less: Loan Repayment (2,000,000) (2,000,000) (2,000,000) (2,000,000) (2,000,000) Less: Capital Expentiture (1,200,000) (1,320,000) (1,452,000) (1,597,200) (1,756,920) less: changes in WC (3,000,000) (550,000) (605,000) (665,500) (732,050) Free Cash Flow (FCF) 0 (1,000) 6,390,385 7,150,181 4,985,166 7,552,788 Net Working Capital 2,500,000 5,500,000 6,050,000 6,655,000 7,320,500 8,052,550
• 15.
  Weighted Average Costof Capital (WACC): 7.70% Year 1 2 3 4 5 Sales 27,500,000 30,250,000 33,275,000 36,602,500 40,262,750 Net Profit 2,899,000 3,310,385 3,762,181 4,258,366 6,753,308 NPM 10.54% 10.94% 11.31% 11.63% 16.77% Expected return (RM) 12.24% Risk free Return ( RF) 9.00% Beta Value 1.31 Sector:Engineering/Construction Cost of Eqity ( CAPM ) 13.24% Long Term Borrowings 9,000,000 0.75 Equity + Retained Earings 3,000,000 0.25 Total 12,000,000 1 Cost of debt 5.85% 9%*(1-0.35) WACC 7.70%
• 16.
  Equity Valuation: Amount in` Weighted Average Cost of Capital (WACC) 7.70% Long Term FCF growth rate 5.00% Year 1 2 3 4 5 Free Cash Flow (FCF) (1,000) 6,390,385 7,150,181 4,985,166 7,552,788 Add: Terminal value 0 0 0 0 293,880,858 Total Cash flow (1,000) 6,390,385 7,150,181 4,985,166 301,433,646 Discount Factor 0.929 0.862 0.801 0.743 0.690 Discounted Free Cash Flow (929) 5,509,441 5,723,845 3,705,448 208,038,204 Sum of Discounted Cash Flow 222,976,009 Add: Cash 500,000 Enterprise Value 223,476,009 Less:Long Term Borrowings (9,000,000) Equity Value 214,476,009 Value per Share in ` 2,144.76
• 17.
  MERITS • Sound Model– Estimated Future CF • Expectation of Biz performances • Not vulnerable to creative accounting • Suitable method for startup projects DEMERITS • Garbage in & Garbage Out • Not considering qualitative factors • Non linear growth in biz • Risk Element • Non-financial factors
• 18.
   Inconsistency inGovt. policy – Taxation (FII – MAT) & Regulatory (PAN req. any purchase > 1 Lac)  Company performance will be affected operating management  Discount rate & Terminal value estimation – valuation impact  Macro Economic issues