Motilal Oswal Case Questions

By: Aakriti Uppal

Investment opportunities and investment instruments in emerging markets

There are many investment opportunities in emerging markets like India. Such markets usually undergo
constant evolution in terms of government policies, business environment, FDI norms etc. Investors
want to buy where the growth is, and they know that growth is coming from the emerging markets.
Investors loog for those countries that are looking to maintain or lower rates of taxation on capital
alongside a policy of gradual currency appreciation. Predictability on tax rates is generally positive;
meanwhile currency appreciation is a powerful ally in the fight against inflation.

Investment opportunities come up in the form of new businesses where venture capitalists can invest.
Lot of technology related businesses flourish in emerging economies but these are risky due to so many
of them coming up so investor has to choose wisely. Stocks/shares, mutual funds, hedge funds,
derivatives market are other instruments where opportunities exist.

Investigate the timing around the IPO and how interests can differ between not just the company and
investors and even between the private equity firms themselves.

For the company, the timing revolves around factors like its recent growth, revenues in the previous
and current quarters, its current and future profitability, its expansion opportunities according to the
market conditions supported by favorable government policies etc. Motilal Oswal wanted to increase
their balance sheet and international credibility and the time chosen was suitable to them since they
were earning good profits at the time. It would allow them to expand their business and increase their
valuation. They were also contemplating on delaying the IPO by a year to go for it from a stronger
position as they wouldve grown more organically by then. But this was risky as the conditions which
were favorable now might not stay the same after a year.

Investors and private equity firms main interest is to exit during an IPO successfully. Anything that
prevents them from exiting is unfavorable for them. For instance the timing chosen by Motilal Oswal
(mid May) posed a problem for the private equity investors. A government policy required them to hold
off the shares for another year if the company went for an IPO in May. A later date would be favorable
for an investor looking for an exit but it would be favorable for an investor looking at a long term
position.
Possible valuation approaches.

1. Asset-Based Approaches

Basically, these business valuation methods total up all the investments in the business.

Asset-based business valuations can be done on a going concern or on a liquidation basis.

A going concern asset-based approach lists the business's net balance sheet value of its assets and
subtracts the value of its liabilities.

A liquidation asset-based approach determines the net cash that would be received if all assets were
sold and liabilities paid off.

These business valuation methods are predicated on the idea that a business's true value lies in its
ability to produce wealth in the future. The most common earning value approach is Capitalizing Past
Earning.

With this approach, a valuator determines an expected level of cash flow for the company using a
company's record of past earnings, normalizes them for unusual revenue or expenses, and multiplies the
expected normalized cash flows by a capitalization factor.

The capitalization factor is a reflection of what rate of return a reasonable purchaser would expect on
the investment, as well as a measure of the risk that the expected earnings will not be achieved.

Discounted Future Earnings is another earning value approach to business valuation where instead of
an average of past earnings, an average of the trend of predicted future earnings is used and divided by
the capitalization factor.

Well established businesses with a history of strong earnings and good market share might often trade
with a capitalization rate of, say 12% to 20%. Unproven businesses in a fluctuating and volatile
market tend to trade at much higher capitalization rates, say 25% to 50%.

Market Value Approaches

Market value approaches to business valuation attempt to establish the value of your business by
comparing your business to similar businesses that have recently sold. Obviously, this method is only
going to work well if there are a sufficient number of similar businesses to compare.