Illustrative Problem on Relative Valuation of Equity Shares Fin. Nos. / Rs.

Mln

A. Data Provided for Category of Firms in Industry and Target Firm Solution is shaded in grey colour
Financial Variables Firms and Performance Level in Industry Target Firm to be Valued
Best Mid Lowest Average Nrst. Peer Vs. Best Vs. Mid Vs. Avg. Vs. Peer

1. Net Worth 40,000 25,000 11,000 25,333 19,000 20,000 20,000 20,000 20,000
2. Sales 100,000 55,000 19,800 58,267 41,800 40,500 40,500 40,500 40,500
3. EBITDA 45,000 25,000 15,000 28,333 17,556 16,200 16,200 16,200 16,200
4. EBIT 40,500 20,000 10,500 23,667 15,098 13,770 13,770 13,770 13,770
5. PAT 20,250 8,000 3,150 10,467 11,324 10,328 10,328 10,328 10,328
6. No of Equity Shares (Mln.) 2,000 1,200 500 1,233 1,200 1,150 1,150 1,150 1,150
7. EPS 10.13 6.67 6.30 8.49 9.44 8.98 8.98 8.98 8.98
8. Market Price of Shares (PE Ratio) 263.25 106.67 63.00 147.07 188.73 * 233.49 143.69 155.63 179.61
9. Net Debt (Loans - C & CE) 40,000 42000 17,500 33,167 27000 28,000 28,000 28,000 28,000
10. Enterprise Value 566,500 170,000 49,000 214,554 253,472 296,515 193,240 206,976 234,550
Ratios
A. Book Value / Share (1/6) 20.00 20.83 22.00 20.54 15.83 17.39 17.39 17.39 17.39
B. Price to BV (8/A - Times) 13.16 5.12 2.86 7.16 11.92 13.43 8.26 8.95 10.33
C. PE Ratio (8/7 - Times) 26.00 16.00 10.00 17.33 20.00 26.00 16.00 17.33 20.00
D. EV to Sales (10/2 - Times) 5.67 3.09 2.47 3.68 6.06 7.32 4.77 5.11 5.79
E. EV to EBIDTA (10/3 - Times) 12.59 6.80 3.27 7.57 14.44 18.30 11.93 12.78 14.48
F. EV to Net Worth (10/1 - Times) 14.16 6.80 4.45 8.47 13.34 14.83 9.66 10.35 11.73
G. Market Cap to Net Worth 13.16 5.12 2.86 7.16 11.92 13.43 8.26 8.95 10.33
* Based on PE Ratio
B. Valuation of Target Firm's Equity Share using nearest peer company's data
UOM Rs / Share
1. Value of Traget's Equity based on PE Ratio 179.61
2. Based on EV to EBIDTA Ratio
a. EV to EBIDTA Ratio of Peer Times 14.44
b. EV of Target Firm Rs/ Mln. 233,895
c. Less Net Debt Rs/ Mln. 28,000
d. Total Market Value of Eq. Shares Rs/ Mln. 205,895
e. Price per Equity Share Rs/ Share 179.04

3. Based on EV to Sales Ratio

a. EV to Sales Ratio of nearest Peer Times 6.06
b. EV of Target Firm Rs/ Mln. 245,589
c. Less Net Debt Rs/ Mln. 28,000
d. Total Market Value of Eq. Shares Rs/ Mln. 217,589
e. Price per Equity Share Rs/ Share 189.21

4. Based on EV to Net Worth

a. EV to Net Worth Ratio of nearest Peer Times 13.34
b. EV of Target Firm Rs/ Mln. 266,813
c. Less Net Debt Rs/ Mln. 28,000
d. Total Market Value of Eq. Shares Rs/ Mln. 238,813
e. Price per Equity Share Rs/ Share 207.66

5. Based on Weighted Average of Relative Valuations Highest weight for Lowest Value Equal Weight for all values
Calculated Assumed Proportion of Calculated Assumed Proportion of
Share Price Weight Price Share Price Weight Price
Rs. / Share % Rs. / Share Rs. / Share % Rs. / Share
Determined Share Prices based on
PE Ratio 179.61 30% 53.88 179.61 25% 44.90
EV to EBIDTA Ratio 179.04 30% 53.71 179.04 25% 44.76
EV to Sales Ratio 189.21 25% 47.30 189.21 25% 47.30
EV to Net Worth Ratio 207.66 15% 31.15 207.66 25% 51.92
Final Share Price based on Relative Valuations 100% 186.05 100% 188.88

Note: If valuation has also been done using Discounted Cash Flow method, the ascertained value can also be considered for calculation of final value using the above
weighted average method

Teaching Note of Paritosh Basu