POST GRADUATE PROGRAM IN MANAGEMENT 2013-14 TERM: V Title of the course: Business Analysis and Valuation Credits: Email:

3 tapak7@yahoo.com Phone & Mobile numbers: +91-9940177674 Name of the faculty member: Mr. Deepak Kapur Faculty block:

COURSE DESCRIPTION: Business Analysis and Valuation is a 15 session elective course meant for participants interested in understanding how to apply simple present value tools to calculate the intrinsic value of a business and relate it to how the market values listed businesses. COURSE OBJECTIVES: The principle objectives of the course are: 1. 2. To demonstrate the link between valuation and the competitive positioning of a business. To discuss the accrual accounting based discounted valuation models, (as against the more commonly discussed cash flow based discounted valuation models) and establish the equivalence of these models with cash flow based discounting valuation models. To discuss the uses and misuses of multiple based approaches in valuation as well as learn to correctly analyze and apply multiples in valuation. To demonstrate the application of the above theoretical frameworks using market pricing of stocks. To discuss issues specific to valuation in case of M&A Appreciate the limitations in valuing a business.

3. 4. 5. 6.

PEDAGOGY / TEACHING METHOD: The course relies largely on lecture presentations and discussions and a mix of examples taken from amongst the companies listed on the Indian Stock Exchanges. EVALUATION Class participation Quiz Individual assignments Group assignments ... ... ... Mid-term examination Weightage( %) 0 0 0 30 35

End-term examination Total LIST OF TEXT BOOK: NIL

35 100

LIST OF ADDITIONAL BOOKS / READINGS: 1. BG: Value Investing From Graham to Buffet and Beyond by Bruce C.N. Greenwald, Judd Kahn, et. al, - Chapter 3,4,5,6,7 from the book are given as photocopied reading material. 2. MK: Valuation: Measuring and Managing Value of Companies, McKinsey, 4th edition by Tim Koller, Marc Goedhart - Chapters 3,5, Appendix A, Appendix B, (pages 47-68, 693700, 101-132,) from the book are given as photocopied reading material. 3. AD: Damodaran on Valuation by Aswath Damodaran, 2nd edition (Chapters 2,7,8,9,13,15) refer online version of book at http://pages.stern.nyu.edu/~adamodar/ 4. WB: Superinvestors of Graham and Doddsville by Warren Buffet soft copy 5. Valuing Companies by Cash Flow Discounting Ten Methods and Nine Theories - Soft Copy 6. Changes in Schedule VI of Companys Act affecting reporting of B/S and P&L Soft Copy 7. PV: Primer on Time Value of Money Soft Copy

SCHEDULE OF SESSIONS: Module I: Introduction to Business Valuation Module Objective: a) To understand the diverse needs and importance of business valuation. b)To revise elemental present value concepts which will be used in this course c) to analyze and recast financial statements in order to be able to look beyond the published financial ratios and understand the true operating return on capital of a business and prepare financial statements to do the business valuation. Session 1: Introduction to Business Valuation Objective: Introduce the students to the world of Business Valuation its diverse needs and purposes ranging from investment decision making to settlement of disputes in courts; Present a broad framework of valuation techniques used by valuation professionals; Revisit Present Value formulae learnt in other courses which will be needed in this course; briefly discuss the effect of changes in Schedule VI of Companys Act Reading(s) PV Primer on Time Value of Money Given as Soft Copy Reading (optional) : Changes in Schedule VI of Companys Act affecting reporting of B/S and P&L Soft Copy Sessions 2&3: Reclassifying financials to understand the true Return on Capital of a business as well as normalizing financial statements Objective: The published financials of a company are based on accrual accounting principles. Even with these guiding principles a valuation professional can rarely get a true insight into the operating performance of the core business by relying on the published

financials. This session uses the example of Infosys financial statements to demonstrate how to adjust line items on balance sheet and profit loss statement and recast them to present operating and non operating balance sheet and income statements. Only from a historical analysis of such recast statements it is possible to understand the true return on capital being delivered by the business. The student will observe how data-base reported ratios are substantially different from those calculated in class, as in the case of Infosys. This session serves as preparatory session for next module where return on capital forms the basis for understanding the link between valuation and competitive advantages of a firm. Normalizing financial statements helps to recast financials in order to reflect a truer sense of economics of the business. Reading(s) Students are expected to go through the annual reports / website of Infosys for classroom discussions as well as revise their formulae for profitability ratios taught in basic finance courses. Students are expected to be able to apply the understanding of this session to the financials of MRF and ACC Limited as a practice exercise. Module II: Link Between Competitive Advantage and Valuation Module Objective: The aim of this module is to stress the need for the student to understand the competitive position of a business from a valuation view point. This model introduces the student to a powerful but simple framework of linking the appropriate valuation model to be used based on the competitive nature of the business being analyzed. Sessions 4 - Understanding Competitive Advantage in the context of Valuation Objective: To understand the three sources of value asset value, earnings value and the value of growth Reading(s) Valuation in Principle, Valuation in Practice Chapter 3 (BG) Examples: Infosys, Page Industries, MRF, Indian Hotels and Hindalco (Students are expected to go through the annual reports / website of the company no structured case study is given). The same examples will be used in session 4 also. Session 5 Reproduction Cost of Assets (RCA) and Earning Power Value Objective: To understand how to calculate reproduction cost of assets and the earning power based value of a business. The students Reading(s) Valuing the Assets: From Book Value to Reproduction Costs Chapter 4 (BG) Earnings Power Value: Assets Plus Franchise Chapter 5,6 (BG) Module III: Discounted Accrual Accounting Valuation Models Module Objective: The three main objectives of this module are: a) to learn the modeling and correct application of (firm as well as equity) accrual accounting based discounted valuation models namely: Economic Profit based discounted valuation model and residual earnings based discounted valuation models b) to demonstrate that discounted accrual accounting based valuation models are far more insightful than discounted cash flow models in studying the value of businesses and its link to the competitive position of a firm. Many seemingly irrational prices in the market appear more reasonable if this framework is well

understood and applied. Their ease of use as compared with DCF models makes them a more appropriate choice in most circumstances. c) To demonstrate that the results obtained by using accrual accounting based discounted valuation models are identical to those obtained by using DCF models. Session 6&7 Economic Profit based Firm Valuation Model and its equivalence to DCF for firm Objective: To model and apply the economic profit based discounted valuation model. In this session we: Demonstrate how economic profit model is derived from the fundamental PV of cash flows equation Understand the right approach to use to calculate firm value using this model Apply the theory discussed to a hypothetical example as well as the recast financials of a sample company Demonstrate how even if historical balance sheet is rewritten in market value terms, the economic profit based model will still give identical value if applied correctly Compare the value obtained using this model with Firm DCF model and demonstrate their equivalence Point out common sources of errors in application of this model Reading(s) Fundamental Principles of Value Creation Chapter 3 (MK) Frameworks for Valuation Chapter 5 (MK), Appendix A&B (MK) Session 8&9 Residual Earnings based Equity Valuation Model Objective: To model and apply the residual earnings based discounted valuation model. In this session we: Define and calculate residual earnings of a company. Understand the right approach to use to calculate equity value using residual earnings based discounted valuation model Apply the theory discussed to a hypothetical example as well as the recast financials of Infosys Demonstrate how even if historical balance sheet is rewritten in market value terms, the economic profit based model will still give identical value if applied correctly Compare the value obtained using this model with Equity DCF model and demonstrate their equivalence Point out common sources of errors. Reading(s) Valuing Companies by Cash Flow Discounting Ten Methods and Nine Theories - soft copy . Session 10 Challenges in Calculating Discount Rates Objective: Valuation is extremely sensitive to discount rates used in the models. Students are already familiar with calculation of WACC and cost of equity based on capital asset pricing model. However valuation professionals encounter several challenges in calculating discount rates based on the same. Further several prominent money managers are questioning these efficient market hypothesis based discount rate calculations (i.e. CAPM based cost of equity). In the light of the same, as well as because of the important role discount rates have to play in

the final value of a business, it is imperative to point out to student s alternative ways of approaching this challenge as a practitioner. In this session we discuss how accrual accounting based valuation models provides an alternative way to guess the discount rates a market uses for a company. We also discuss the trade off an analyst can make in estimation of growth rates and discount rates which eases the difficulty of calculating discount rates. Reading(s) Super-investors of Graham and Doddsville (WB) Estimating Discount Rates Chapter 2 of AD (optional)to understand why the world of money managers are questioning efficient market hypothesis based discount rate calculations (i.e. CAPM based cost of equity) Module IV: Relative Valuation Module Objective: To understand the uses and misuses of multiple based relative valuation techniques and to understand some important considerations while creating M&A valuations models. Sessions 11&12 - Relative Valuation Objective: Multiple based valuations are widely used in the industry. However there are several pitfalls in the use of this technique which results in erroneous conclusions. These two sessionshighlights some of these pitfalls and also discusses the right way to use relative valuation. This session discuss the PE, PEG, PBV, EV/EBIDTA and P/S ratios. Reading(s) Equity Multiples and Value Multiples, Chapters 7,8,9 of AD (optional) Module V: Miscellaneous Topics in Valuation Module Objective: In this module we discuss some important aspects of valuation related to M&A valuation; the link between Debt and Value; the link between Dividends and Value. Session 13 Considerations in case of M&A Valuation Objective: Value of Synergy and Value of control are two important but oft confused concepts to be considered in case of valuations in the context of mergers and acquisitions. This sessions deals with the right approach to valuation in M&A so that value of control and value of synergy can be independently calculated. Reading(s) Chapters 13 and 15 of AD Session 14 Dividends, Debt and their link to Value Objective: The study of listed securities shows that markets do incorporate effects of dividends and debt in valuation. Understanding how markets treat the two is important in arriving at appropriate value unlocking strategies for corporate finance consultants. In these sessions we discuss the above by looking at some examples as well as relevant theory. Reading(s) None Session 15 Course Summary and Review Objective: In this session we revise course concepts, try thumb rule application of accrual accounting valuation models to summary financials of various companies and compare the answers with market capitalization of companies to reinforce the value of these models. Finally to test the students understanding of the course we discuss how market values dividends.