PROJECT iBANKING

A STUDY ON BUSINESS VALUATION AND STRATEGIC ADVISORY SERVICES FOR CLIENTS OF PEARS CAPITAL WITH RESPECT TO M&A AND PE SYNDICATION

The report is submitted as partial fulfilment of the requirement of PGDM programme of ITM Business School, Siruseri, Chennai

By SANDHYA.H
(CH2009PGDM15F43)

Institute for Technology and Management Business School Siruseri, Chennai July 2010

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ACKNOWLEDGEMENTS

My sincere thanks to Mr. Ramkumar R, Founder & Managing Partner of Pears Capital, for having given me an opportunity to work with the organization and guiding me through the entire project. He was instrumental in orienting and training me for the internship program.

Special thanks to Ms. Jalaja Bhat, Associate Partner of Pears Capital for her timely support and guidance during the internship.

I sincerely thank Dr.G.K.Sharma, Director, ITM Business School, Chennai for making this project a part of the curriculum. Many thanks to Prof. V.S Kumar, Faculty Guide, ITM Business School, Chennai for his valuable guidance and kind patronage to make this project a great success.

Last but not least I would like to thank the entire Pears Capital team for having helped me in making this internship an enriching learning experience. This project has indeed given me a lot of exposure in terms of handling different kinds of people, in particular, clients and investors.

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EXECUTIVE SUMMARY
This project focuses on the Business Valuation and Strategic Advisory services for clients of Pears Capital with respect to Mergers & Acquisitions and Private Equity Syndication. Most of the deals in the project revolve around Private Equity Syndication and Mergers and Acquisitions. Business advisory forms a very minimal part of it. Business development i.e. adding new clients to Pears Capital is a critical part of this project. The task involves more of front end process and direct handling of clients/investors. The main sectors that are tracked in this project include Education, FMCG and Contract Research Organizations. As an initial procedure in the deal process, it is important to understand a client’s business model. An essential prerequisite to understanding a client’s business model is a thorough understanding of the industry and the market players for which extensive research is done. This helps in better analysis of the financials of the company and its future projections. Followed by financial modelling, which aids in business forecasting, estimating profitability and cash flows. The financial model is backed by detailed assumptions, supporting tables and computation and spread sheet analysis. Projected Income statement, balance sheet and cash flow statements are also prepared. Based on the future projections and the market scenario, various types of valuation methodologies are used to arrive at a final valuation of a company. Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. Valuation methodologies for PE deals are broadly based on the 2 approaches-Multiplier and Discounted Cash Flow approach. The benchmark valuation would then help in restructuring and negotiation processes. These opportunities are run by many Private Equity investors by sending them a teaser about the opportunity. A teaser is a short description of the company on a no name basis which is floated by many investors. Investors who are interested in the profile of the company will contact Pears and request for more information. Closure of a business process occurs with the finalization and execution of term sheet, completion of Due Diligence, satisfaction of conditions by both parties, vetting of the documentation, Final execution of documents for the deal, Investor releases the funds. Role of Pears Capital comes to an end.

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TABLE OF CONTENTS

Cover & Title Page i Certificate from SIP Company ii Acknowledgements iii Executive Summary vi List of Tables vii List of Figures 1 CHAPTER 1: INTRODUCTION 1 1.1 Brief Introduction 2 1.2 Objectives of the study 2 1.3 Scope of the study 3 1.4 Methodology 4 1.5 Limitations 6 6 2.1 Company Overview 7 2.2 Team Profile 8 2.3 Pears’ Transactions 9 9 3.1 Mergers and Acquisitions 11 3.2 Private Equity 15 3.3 Business Valuation

CHAPTER 2: PEARS CAPITAL

CHAPTER 3: LITERATURE REVIEW

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2 Project Radiant-A CRO Opportunity 44 47 48 50 CHAPTER 5: FMCG SECTOR CHAPTER 6: ROLE OF PEARS CHAPTER 7: FINDINGS AND CONCLUSIONS ANNEXURE-Sample Teaser REFERENCES GLOSSARY v .1 PE Process at Pears 35 6.1 Industry Overview 32 5.1 Industry Overview 22 22 26 4.2 Trading Comparables 33 5.CHAPTER 4: EDUCATION SECTOR 4.3 Transaction Comparables 34 34 6.2 Trading Comparables 27 4.3 Transaction Comparables 28 28 5.

2.2 5. 12 26 27 32 33 39 40 41 42 43 43 vi .1 4. 11. 8. 5.2 6. 3. 10.2 6. Table No. 7. 6.6 Name of the Table Comparison of various funding options Trading Comparables-Education Sector Transaction Comparables-Education Sector Trading Comparables-FMCG Sector Transaction Comparables-FMCG Sector Revenue Assumption Sheet Profit and Loss Statement Discounted Cash Flow Statement Trading Comparables Transaction Comparables Valuation Table Page No.1 6.No. 3. 1. 4.LIST OF TABLES S.1 4.1 5.3 6.4 6.5 6. 9.

No.1 Utilization of outsourcing across key industry value chain components 37 vii . 3. 5. Figure No. 6. 3. 3.3 DCF Process 20 4. Name of the Figure Page No.1 Components of FMCG Sector 30 7.2 Valuation Overview 16 3. 1.1 Process Of a Private Equity Deal 14 2. 4. 4.2 Non-formal IES-Split up 23 6.1 Formal IES-Split up 23 5.LIST OF FIGURES S.

banking and financial institutions on the one hand and the capital market on the other hand are two broad platforms of institutional intermediation for capital flows in the economy. Investment Banks help companies and governments raise money by issuing and selling securities in the capital markets (both equity and debt).CHAPTER 1 INTRODUCTION 1. Thus the entire process of rendering strategic. This project thus attempts to study the concept of Business Valuation and strategic advisory with respect to Mergers and Acquisitions and Private Equity Syndication through real time experience at Pears. as well as providing advice on transactions such as mergers and acquisitions. to those who need to make use of them for generating GDP (the Issuers).e. is concerned with the primary function of assisting the capital market in its function of capital intermediation. It would involve the front end process and direct handling of clients to understand the business models. the same valuation tools are often used by business appraisers and many other business and legal purposes. The role of an investment banker as an intermediary is phenomenal. In addition to estimating the selling price of a business.1 BRIEF INTRODUCTION At a very micro level. ‘Investment Banking’ as the term suggests. Preparation of teasers and financial models through the application of the concept of Business Valuation would also be a part of the deal process. it could be inferred that investment banks are those institutions that are counterpart of banks in the capital market in the function of intermediation in resource allocation. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. Therefore. The iBanker not only assists the companies in information dissemination and execution of financial transactions but also reviews and advises the prospective investors. In other words. financial and valuation advisory services at Pears will be tracked. i. the movement of financial resources from those who have them (the Investors). 1 .

financial and valuation advisory services to clients at Pears Capital 3. To study the concept of Business Valuation with respect to M&A and PE 2. Since. 4. The purpose of the valuation 2 . To understand the business models of the clients of Pears Capital in the Education.2 OBJECTIVES OF THE STUDY The main objectives of the study are: 1. FMCG and CRO sector through analysis of company and industry reports. The requirement here would be the integrity of financial statements supported by concrete evidence to support the statements of returns and projected growth rate sustenance throughout the proposed business period. It is imperative that the methodology used to evaluate a business is appropriately chosen so as reduce the risk of erroneous reports.3 SCOPE OF THE STUDY As associates of Pears Capital. Business valuation methodologies vary vastly across different industries. Since the business here involves presenting the clients’ business to the investor it calls for a detailed study of the industry relating to the business so as to understand the industry growth and other trends and facilitate business valuation. It should also be built on the fact that all the claimed model and financial aspects are properly documentable and not merely sent out in unconformable statements. if not first. it contributes as a psychological factor that investors consider. 1. To study the process of providing strategic. the value of the business is the first aspect that one considers. There exist various methods and tools to evaluate a business according to industry. financial and valuation advisory services to clients. Meetings with clients facilitate in gaining a better understanding of the business model and financials of the clients thus providing a practical exposure. A detailed analysis of the respective clients’ business model and preparation of financial models thus accomplishes in the procurement of in depth understanding of the value of the clients’ business. the experience provides us a complete insight into the process of providing strategic.1. To apply the concept of Business valuation to appraise the businesses of the clients of Pears.

supporting tables and computation and spread sheet analysis. Based on the future projections and the market scenario. various types of valuation methodologies are used to arrive at a final valuation of a company. estimating profitability and cash flows. 3 .4 METHODOLOGY Business Development Business Development is a critical part of any investment bank. This helps in better analysis of the financials of the company and its future projections. Data Collection Data collection is an essential prerequisite in the deal process. As an initial procedure in the deal process. To gain a thorough understanding of the industry and the market player’s extensive research is done. The industry data and other business data are gathered from industry research reports and other publications. Client meets provide the necessary first hand information on their financials and other business processes. It is thus the selection of the right combination of tools and methods that results in proper valuation.is also required to be considered as a key factor. The benchmark valuation would then help in restructuring and negotiation processes. Projected Income statement. Financial Modeling and Business Valuation Financial modelling aids in business forecasting. Business valuation also helps in identifying strategic alternatives/opportunities for a business. These may have been devised for future implementation nevertheless a clear understanding of its implications and its cause and effect has to be presented to clients and to the investors of mutual understanding of each ones intentions and direction of the business growth. The task involves more of front end process and handling clients/investors. Therefore this first step would facilitate in getting a clear picture of the clients business. 1. it is important to understand a client’s business model. balance sheet and cash flow statements are also prepared. The financial model is backed by detailed assumptions.

Since the procedures have been stretched across time and also intermittent actions are dynamic in nature. But efforts are taken so as to maintain integrity of the information and also the correctness and accuracy.Presentation Once the financial model is prepared a teaser/ pitch book is prepared. 1. Since the initial procedure to a proposal is research and data mining of the concerned proposal. which is definitely out of scope of our project period. Thus only a sizeable amount of information is collected and hence we are constrained to work with minimal resources and information.5 LIMITATIONS Time Factor Due to a substantial amount of funds movement and procedures to be followed for any business process.. 4 . A teaser is a short description of the company on a no name basis which is floated by many investors These opportunities are run by many PE investors by sending them the teaser about the opportunity. depending on the size of business. Industry Size The vastness of an industry also poses as a major limitation as it does not provide us with time required to examine and study all the significant players in the industry. Thus time factor also being a major constraint in this regard. we are not involved in the continuity processes and thus have to observe other processes in the middle of their execution to make a general assumption that on an overview these are the procedures that the project we are involved in will also encounter. and also factoring in the levels of approvals and stages the process follows. only a general outlay of the processes can be explored and detailed aspects of the procedure are not possible to attain. Investors who are interested in the profile of the company will contact Pears and request for more information. the procedure from proposal to finalization and actual closure of a deal takes anywhere between 6 months to 1 yr.

5 . Thus methods of gathering information and data mining techniques are adapted.Accessibility Access to research reports is not easily attained since they tend to infringe on privacy issues on businesses and thus a full and detailed report on a research is difficult to come by for analysis. Also it is important that we do not use any copy right material that we may want to be published in future and hence a proper documentation of such material has to be maintained so as to perform a credit mention in the event of publishing.

focused exclusively on Mergers. It also has more than 25 Cross border partnerships with other Investment Banks across the world. Pears Capital is sector agnostic and takes up deals from various industries including FMCG. Singapore and Australia. 6 . The team as sector experts who would work on deals in their respective sectors. ISB and INSEAD. Engineering.1 COMPANY OVERVIEW Pears Capital is a specialized investment bank. consisting of CAs. CFAs. Acquisitions. Technology. Lawyers and experienced graduates from premier business schools like IIM. Pharma. Dubai. Capital Raising and financial & strategic advisory services. The team has established a wide spread corporate network spanning the globe with Cross Border offices in New Jersey. Private Equity Amalgamation Restructuring Services – “PEARS” has exclusive focus on Corporate Finance activities such as Mergers & Acquisitions Private Equity syndication Debt Solutions Due Diligence Real Estate financing Valuation Advisory and Business Advisory The firm was founded in 2007 by Ramkumar R and a team of veterans with significant experience in investment banking. Financial services. Pears consists of a team of over thirty people with deep domain expertise across sectors.CHAPTER 2 PEARS CAPITAL 2. Real estate and Auto ancillaries.

2. A brief profile of each of the core team members is mentioned below: 7 .2 TEAM PROFILE Pears Capital consists of a solid team of sector agnostic domain experts.

2 PEARS’ TRANSACTIONS myeasydocs.2.com Doctors Bio Lab Private Limited Chennai Cancer Care Business and Financial Valuation Advisory Acquisition of Hi-Tech Pharmaceuticals Private Limited Due Diligence and Transaction Advisory September 2008 January 2009 February 2009 Exito Management Consultants Ltd Shree Micro Finance Business Management and Transaction Advisory Business Structuring and Capital Raising March 2009 March 2009 Godrej consumer products Ltd Acquisition of Argencos SA June 2010 8 .

M&A transactions can be broadly divided into either mergers or acquisitions. Typically. M&A advising is highly profitable. Or perhaps a big public firm aims to buy a competitor through a stock swap. These terms are often used interchangeably. Perhaps a small private company’s owner/manager wishes to sell out for cash and retire. In particular. M&A advisory falls onto the laps of M&A specialists and fits into one of the two buckets: seller representation or buyer representation (also called target representation and acquirer representation) 9 . combine to create a new company. M&A ADVISORY SERVICES For an I-bank. often roughly of the same size. the target company ceases to exist post-transaction (from a legal corporation point of view) and the acquiring corporation swallows the business. Both can win from a transaction. The stock of the acquiring company continues to be traded.CHAPTER 3 LITERATURE REVIEW 3. Whatever the case. and there are many possibilities for types of transactions. and new company stock is issued in its place. And that is much of the allure that has driven the tremendous volume of M&A activity worldwide over the last two decades.1 MERGER AND ACQUISITIONS Buyers and sellers can create substantial value through merger and acquisition (M&A). Merger – A merger occurs when two companies. Acquisition – When a larger company takes over another (smaller firm) and clearly becomes the new owner. Such a situation is often called a “merger of equals. M&A advisors come directly from the corporate finance departments of investment banks. the purchase is typically called an acquisition. That is the beauty of deal making.” Both companies’ stocks are tendered (or given up). but we can still draw a rough difference between the two.

the work involved in finding a buyer includes writing a Selling Memorandum and then contacting potential strategic or financial buyers of the client. few firms or owners are willing to readily sell their business. Also known as sell-side work. Deals that do get done. 10 . when advising clients looking to buy a business. the I-bankers will contact firms in that industry. for instance. If the client hopes to sell a semiconductor plant. These acquisition searches can last for months and produce nothing except associate and analyst fatigue as they repeatedly build merger models and pull all-nighters. though. and makes the deal a reality. plant or subsidiary operation.Representing the target An I-bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an I-bank that represents a potential acquirer. Consequently. (Again. Or the investment bank may “pitch” the idea of an acquisition of Company X to the acquiring company. Buy-side work is an entirely different animal. Often. as well as buyout firms that focus on purchasing technology or high-tech manufacturing operations. the I-bank’s work is complete once another party purchases the business up for sale. The advisory work itself is straightforward: the investment bank contacts the firm their client wishes to purchase. their work often goes unpaid. attempts to structure a palatable offer for all parties. most of these proposals do not work out. sell-side representation comes when a company asks an investment bank to help it sell a division. an I-bank’s work often drags on for months.) However. Often a firm will pay a non-refundable retainer fee to hire a bank. the initial contact may be from the acquiring company. Representing the acquirer In advising sellers. this type of advisory assignment is generated by a company that approaches an investment bank (also an investment bank may also make the initial approach and “pitch” the idea of the company being sold or merged) and asks the bank to find a buyer of either the entire company or a division. Generally speaking. are a boon for the Ibank representing the buyer because of their enormous profitability. And because the I-banks primarily collect fees based on completed transactions.

strategies and asset classes that are complimentary to the stock and bond portfolios traditionally used by investors.2 PRIVATE EQUITY Private Equity is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange. Private equity investment is typically a transformational. comprising a variety of investment techniques. This chart shows the main components of the alternative investment space at a broad level. 11 . The various investment categories in Private Equity includes: Venture Capital. Many investors still with little or no existing allocation to private equity are now considering establishing or significantly expanding their private equity programs. active investment strategy. The processes of buyout and venture investing call for different application of these skills as they focus on different stages of the life cycle of a company. Replacement Capital and Buyout. Private equity investing calls for a specialized skill set which is a key due diligence area for investors' assessment of a manager. Private equity has arrived as a major component of the alternative investment universe and is now broadly accepted as an established asset class within many institutional portfolios.3. Seed stage financing. DEFINITION OF PRIVATE EQUITY Private equity investing may broadly be defined as "investing in securities through a negotiated process". Expansion state financing. value-added. Private equity is often categorized an "alternative investment". The majority of private equity investments are in unquoted companies. There are a wide array of types and styles of private equity and the term private equity has different connotations in different countries.

Assist the company in coordinating information dissemination and due diligence program • • Review and advise the prospective investors Oversee the execution of financial transactions and provide other services 12 .Table 3.1: Comparison of various funding options Parameters Increasing business risk / New business model evolution / New ventures Revenue less than threshold Funding flexibility Branding / Company reputation Organizational development Portfolio advantage / Synergies Market pressure Regulatory screening Valuation Control over management Costs company & Private Equity Public Listing Debt 1 3 2 1 1 1 1 1 2 2 1 3 2 3 3 2 3 3 2 2 3 2 2 3 1 1 1 1 ROLE OF AN INVESTMENT BANKER The role of an investment banker in a PE process can be summarized as follows: • • • • • Identify and initiate contact with prospective investors Represent the company in the meeting Review the outcomes of the meeting Suggest a plan of action.

LBO or Buyout: refers to a strategy of making equity investments as part of a transaction in which a company. The companies involved in these transactions are typically more mature and generate operating cash flows. • Growth capital: refers to equity investments.TYPES OF PRIVATE EQUITY Private equity investments can be divided into the following categories: • Leveraged buyout. 13 . for the launch. business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. most often minority investments. enter new markets or finance a major acquisition without a change of control of the business. or expansion of a business. Venture Capital is often sub-divided by the stage of development of the company ranging from early stage capital used for the launch of start-up companies to late stage and growth capital that is often used to fund expansion of existing business that are generating revenue but may not yet be profitable or generating cash flow to fund future growth. typically in less mature companies. • Venture capital: a broad subcategory of private equity that refers to equity investments made. in more mature companies that are looking for capital to expand or restructure operations. early development.

1 Fig 3.1 Process of a Private Equity deal 3.PROCESS OF A PE DEAL A brief description of the deal process is mentioned in the flow chart shown in figure 3.1: • Seeking a mandate • Perform a limited Due diligence • Financial Modelling • Arriving at the proposed valuation • Preparation of offer literature • Offer formulation • Investor presentations • Term Sheet and Negotiation • Deal Closure 1 2 3 4 5 6 7 8 9 14 .

and many other business and legal purposes. Leveraged Buyout Analysis Each of the types is explained briefly in figure 3.2 Valuation also involves analyzing the economic conditions in the macro environment of the business. Trading Comparables 3. establish a formula for estimating the value of partners' ownership interest for buy-sell agreements. allocate business purchase price among business assets. The financial statements are analyzed thoroughly and the above mentioned four methods are used to arrive at the final valuation of a company/ business. Discounted Cash Flows 2. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business.3 BUSINESS VALUATION Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. divorce litigation. In addition to estimating the selling price of a business. The four basic types of business valuation methodologies used are 1. 15 .3. the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation. Transaction Comparables and 4.

2: Valuation overview 16 .Fig 3.

The equity of fundamentally similar. Accordingly. more focused group of comparables. by its nature. By analyzing certain key ratios and operating data for each of the companies in the comparable universe. markets.COMPARABLE COMPANY ANALYSIS – TRADING COMPS The Comparable Company Analysis is one of several techniques used to determine a range of values for a specific company. or “comparable” companies tends to be valued on a relatively consistent basis by the public markets. The Comparable Company Analysis is. Broadly speaking. EBITDA and EBIT (enterprise value multiples). or The discount the market may place on shares which are newly introduced in an initial public offering or the discount that is appropriate for a private company Identifying the Comparable Company Universe A comparable peer group should possess the same fundamental business and financial attributes such that their public trading values represent a meaningful proxy from which to determine a value range for the target. the valuations received by the comparable universe do not typically reflect: • • The premium a buyer must pay for control of a company in an M&A transaction. the equity markets are likely to value the two businesses in a relatively consistent manner. it is possible to estimate how the public equity markets would value the target. Factors to consider include: 17 . Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales. Relevant attributes include: • • • • • Macroeconomic issues Industry group Business model Geographic location Business mix (products. the “target” company. if Widget Company A competes in the same industry as Widget Company B. using a similar business model. distribution channels) Refining the Comparable Company Universe In some cases it will be necessary to limit the universe to a smaller. based on an analysis of currently public companies.

industry dynamics. includes control premium) 18 . characteristics COMPARABLE TRANSACTION ANALYSIS – TRANSACTION COMPS The Comparable Transaction Analysis is based on the premise that the value of a company or an asset can be estimated by analyzing the prices paid by purchasers of ownership interests in reported comparable transactions.e. in many cases a broad universe of directly comparable companies will not exist. distribution channels. Typical benchmarks include multiples of net income and book value (equity value multiples) and multiples of Sales. customer base. The purpose of the comparable transaction analysis is to derive pricing benchmarks based on the selected transactions. critical inputs/components) Financial characteristics (leverage. size. In contrast to the “Comparable Company Analysis. value) Operating history/philosophy Customers Operations (production. albeit not ideal. In these situations the parameters of comparability will be widened to assemble a group of companies with sufficiently similar. margins) Growth (organic vs. Transaction multiples define the prices that acquirers are willing to pay for companies in that industry in the context of a deal. The analysis provides a history of selected transactions in one particular industry where acquired companies have relatively similar characteristics in terms of economic drivers such as business mix. etc. By applying transaction multiples to financial results of the company being analyzed.” this approach is generally based upon multiples paid for control of a company (i. processes. historical and future growth. it is possible to determine a range of value.. EBITDA and EBIT (enterprise value multiples).• • • • • • • • Size (sales. It compares the transaction values paid for selected companies to the respective companies’ financial results to determine transaction multiples. acquisitions) Profitability Ownership structure Expanding the View of Comparability As a practical matter.

contingent 19 . and to avoid distortions caused by a particular capital structure. • Present Value of terminal value Company value = PV(FCF) = Σ FCFt / (1+r)t + TV / (1+r)n The discount rate r is the Weighted Average Cost of Capital (“WACC”). free from financing considerations) The company’s operational value (prior to adjustments for non-operating assets) can be broken down into two components: • Present Value of free cash flows up to cut point for terminal (or continuing) value calculation.. incidence of other contractual arrangements. auction vs. discontinued operations. negotiated sale) • • • • Attractiveness of the target company Relative needs of seller vs.e. The method entails estimating the free cash flows (“FCF”) available to all investors (equity and debt holders) and discounting these cash flows back to the present using an appropriate cost of capital to arrive at a present value for the assets. In particular.A good understanding of the background and factors surrounding a transaction is necessary to extract meaningful conclusions from the analysis. including: • Nature of transaction (minority stake vs. foreign vs. buyer (i. domestic) Underlying market conditions (state of M&A. financial.. a distressed seller may get a lower price) Identity of acquirer (strategic vs. which reflects the required returns by both debt and equity investors for investments with the same risk profile. hidden assets. the cash flows should be considered on an unlevered basis (i. These assets may be financed in a multitude of different ways. financing markets) DISCOUNTED CASH FLOW ANALYSIS The DCF analysis is based on the premise that ownership is essentially a claim on the cash flows generated by a firm’s assets. control.e. but because the returns generated by these assets are available to all providers of capital. specific deal circumstances are likely to have an impact on prices paid. equity. The company’s operational value must be adjusted for non operating assets such as investments in unrelated subsidiaries.

etc.g. The DCF process is explained in Figure 3. private investor.3: DCF process LEVERAGED BUYOUT ANALYSIS A leveraged buyout (“LBO”) is an acquisition of a company in which a financial sponsor (e. LBOs are used in numerous types of transactions and corporate finance situations. renting it out and using the rent to pay the mortgage).. The company’s equity value is obtained by deducting the value of the Company’s financial debt and other nonworking capital debt. including: 20 .3 Figure 3.liabilities. Debt is repaid with cash flows of the business acquired (conceptually similar to buying a house. LBOfund) invests a relatively small amount of equity (compared to the total purchase price) and uses leverage (debt or other source of financing) to fund the remainder of the consideration.

re-leveraging the company and paying a large dividend) Leveraged acquisitions by corporations JV LBOs. operating projections and maximum leverage and capital structure parameters. 21 .g....e. and valuation multiple expansion • Highlights the effects of adding leverage to the business (e. It is also necessary to determine the expected method of exit and most likely (and realistic) exit valuation multiples. without any strategic value or synergies). recapitalization. • Estimates the amount a financial buyer would be willing to pay for a business. in most instances the JV structure permits the debt to be off-balance sheet for the corporation LBO Analysis is a valuation methodology that provides an indication of the maximum price that a financial investor would be willing to pay for a business on a stand-alone basis (i. A few of them are mentioned below.e. takeprivate) • Illustrates the debt capacity of business (based both on company specific credit criteria and capital market criteria) In LBO Analysis. in which corporations and financial sponsors partner together to acquire a business in a leveraged transaction (corporations sometimes contribute assets). in which the acquisition is done by the company’s existing management group. and provides sensitivity of the returns to growth. helps to identify potential LBO opportunities • Estimates the potential equity returns to the business. LBO Analysis is used for a number of purposes in various transactions. leverage. there are several assumption areas that need to be addressed. in which a public company goes from being owned and traded by a large number of public shareholders to one that is privately held by a small group of investors • • Buyouts of a subsidiary or division of a larger company by a group of investors Management buyouts. often with the backing of a financial sponsor • • • Recapitalizations (i.• Take-privates. For example. It also indicates the credit statistics and potential equity returns for the business at a given price.

from school to higher education. and a large network of ~1m schools and 18. there is a short supply of educated manpower in India. fall under the purview of the Ministry of Human Resource Development (Department of School Education and Literacy & Department of Higher 22 . India's literacy rate is just 61% and it ranks a disappointing 172nd in the world on this front. the secondlargest in the world. IT Services. SEGMENTS IN THE INDUSTRY The private spend in the education sector is $50bn. Thus. It can be split into two segments: • • Formal ($40bn) and Non-Formal ($10bn) Formal IES: The formal educational system in India broadly comprises schools (often classified as K12–kindergarten to 12th) and higher education (HE) level. All the levels. which is provided by the education companies. IES is by far the largest capitalized space in India with $30bn of government spend (3. to name a few.1 INDUSTRY OVERVIEW The biggest asset of any country is its people. Retail. leading education-hungry and affluent Indians to spend $50bn on private education (14% CAGR over FY08-12E). India has approximately 50. the public education system is ‘insufficient’ and ‘inefficient’. Yet. These schools share a sizable load of educating the Indian student population and satisfy the demand for quality of education and infrastructure by the Indian middle and elite class.000 private schools. present generally in urban clusters. these schools are on always on the look-out for better content. To provide quality education. However. India has a population if 108cr. at global average). Financial Services and Aviation. there is a huge requirement of talent in the fields of Hospitality.000 higher education institutes. In fact. “Over-regulated and under-governed” best describes the largest sector in India –Education (IES).7% of GDP.CHAPTER 4 EDUCATION SECTOR 4. We believe India will have to significantly gear up its educational infrastructure to meet this demand.

Education).e.2: Non-formal IES Coaching classes 0.9% 17. Figure 4 Formal IES – Split up 4. This may be followed by post graduation courses. coaching classes.3% 14. Schools cater to the ‘3 17 years’ age group. The segments are free of any regulations (i. multimedia/ IT to schools and colleges (catering 3 to both private and public institutions). they are ruled by state boards/ ICSE/ CBSE/ International Boards. vocational training and the books market. no governing/ regulatory bodies for this segment).3% Vocational Training Books 3% ICT (in govt schools) Multimedia in Pvt.5-3 years).1: K 12 50% 50% Higher Education formal Non-formal IES: The non-formal education segments flanking the formal ones include preschools (1. 22 HE comprises graduate/ diploma/professional courses. Schools 23 . With a single governing body (UGC). Higher education institutes cater to the ‘18-22 years’ & above age group.8% 0.7% Pre-school 63. e Figure 4. With no central governing body for ‘3-17 K12.

multimedia in 24 . provision of multimedia content. Sectors such as pre-schools. IT training and e-learning are prime sectors in which private players can allocate their funds. These areas are attractive because while they relate closely to the profitable K-12 segment. The huge opportunity in the education sector makes it an attractive proposition for private investors interested in taking advantage of the burgeoning demand for quality education. estimated at US$75bn. We see private players building business models around formal education system.MARKET PLAYERS OPPORTUNITY The Indian education sector. the acute shortage of trained teachers and quality schools combined with cash-strapped governments would open the doors for corporates to capitalize on this opportunity. they are largely unregulated. Despite regulatory constraints. offers enormous opportunities for private players. Segments such as preschool. Liberalization will continue to intensify as the government struggles to provide quality education to the masses. tutoring. The private education market is estimated to be US$45bn of which the size of formal K-12 and higher education market in India is US$30bn.

Companies with scalable model and growth visibility would get better valuations.schools. Indian companies are trading at 7-22x FY10E. With these companies building scalable business models. skill development and vocational are showing more promise and expect them to grow at fast rate. the valuation gap between domestic peers and international players should narrow. 25 . VALUATION The current valuations do not reflect the true potential as the sector is still evolving and there are only few listed companies in India. Everonn Systems and NIIT are market leaders in the field. While international peers are trading at 13-26x CY09E. Companies such as Educomp Solutions.

0 14.2 TRADING COMPARABLES Table 4.0 24.9 11.1: Trading Comparables-Education Sector Particulars NIIT Educomp Birla Shloka Edutech Ltd.2 2.5 3.4 6.7 2.3 1. 26 .0 EV/ EBITDA 8.4.8 The average Sales (trading) multiple is 2.6 4.5 2.5x and the average EBITDA (trading) multiple is 11x for the companies in the education sector.2 5.2 0.6 11.4 9. Aptech Everonn Education Compucom Software Ltd Mean Median Sales Mn (USD) 263 246 38 35 62 13 EBITDA 37 117 2 6 22 6 EBITDA% 14% 47% 4% 17% 36% 45% PAT 8 58 1 (5) 10 2 PAT% 3% 24% 3% -14% 16% 14% Mcap 240 1121 24 143 134 18 Debt 88 175 1 4 19 8 Cash 13 18 2 0 10 3 EV 315 1278 22 146 143 23 EV/Sales 1.

2: Transaction Comparables-Education Sector Year 2010 2009 2007 Mean Target Company Schoolmate Educomp MT educare Investor/Acquirer Edserv Pearson Helix Investments Sales(Mn USD) 0.2 Amount Invested (Mn USD) 0.72 1.32 20 7.5 12 Stake 100% 50% 30% Valuation(Mn USD) 0.87 17.75 5.4.5x for the companies in the education sector.3 TRANSACTION COMPARABLES Table 4.56 3.87 35 40 V/S 2. 27 .34 The average Sales (transaction) multiple is 2.

Furthermore. strong branding and intense competition from organized and unorganized players. This attracts new players and has resulted in intensifying competition. and altered lifestyles. 28 . In the past decade. The FMCG industry is more of a branding industry than a manufacturing one. no other product segment has seen the entry of so many players. The personal and home care segment has very low entry barriers of technology and capital requirements. Also. Barring the fastest-growing personal care segment. the boom has also been fuelled by the reduction of excise duties. like Nirma. Despite this. standing up to their MNC counterparts. when domestic companies were not perceived as competitive vis-à-vis multinational corporations (MNCs). dereservation from the small-scale sector and the concerted efforts of personal care companies to woo the burgeoning affluent segment of the middle class through product and packaging innovations. The sector is characterized by a large distribution network. the personal care industry has witnessed a consumer boom. The size of the Indian fast-moving consumer goods (FMCG) sector is close to Rs 850 bn. sustained profitability and free cash flows are expected to ensure healthy return on equity for the sector.1 INDUSTRY OVERVIEW FMCG sector is the fourth largest sector in the Indian economy and is a key component for India’s GDP as it accounts for 5% of the total factory employment in the country. with some domestic companies. Unlike in the past. The northern and the western regions of the country account for more than half of the market for consumer goods. the scenario is gradually changing. Marico and Jyothi Labs. especially a heightened level of awareness among the rural community. urbanization. the strong distribution networks and heavy investments needed for brand building remain key deterrents to new players. and an increase in the disposable incomes. competition amongst the MNCs has intensified. This has been due to liberalization. consequent to the onslaught of satellite television. leading to shrinkage of margins. Higher asset turnover ratios.CHAPTER 5 FMCG SECTOR 5.

thus benefiting the consumer. A lower price differential between the organized and the unorganized sectors from reducing excise duties allows the former to grow at the expense of the latter. like detergents. The organized sector also has a superior distribution reach. despite the heavy advertising and sales promotion (ASP) expenditure. New products are being launched in niche segments. Rural India accounts for over 70 per cent of the country’s population and is largely catered by unorganized players. have reached a mature phase only in the urban market. the market players have had to absorb a lot of price cuts to boost volumes. and old products re-launched. In the past one year. Besides. Although most of the product categories are still in the growth phase. however. are struggling to maintain top line growth. and is the key to gaining market share. the market has already been segmented and sub segmented. Brand equity drives the customer’s purchase decisions. While the level of disposable incomes determines the overall sector growth. a profusion of promotional schemes are being offered. the industry has been reeling under a demand crunch. 29 . There has been a rapid expansion of the consumer majors’ distribution networks into the rural regions.Low margins and high volumes characterize the industry. but also the ability to absorb frequent price increases. it has become imperative for all major players to increase their penetration levels in rural markets. Most players. With urban markets saturated for most categories. the increased competition has restricted not only growth rates. competitive pressures have hiked the advertising budgets of most players. The increased promotional activity that is taking place amongst players has relegated brand loyalty to the backseat. It should be noted that the affluent segment in the rural sector is growing at a faster rate than the urban one. branding allows companies to partially pass on the cost increases to the customers. Moreover. Companies have launched products at a number of price points to drive up volumes. so as to build volumes. a few broad categories. including Hindustan Lever Ltd (HLL). Most players have introduced products with mass-market pricing. In the personal care sector. With increasing competition. The Indian consumer is very price sensitive. Also.

shampoos among others. While HUL is the largest player in the category with leadership in soaps. Players like Dabur and Godrej Consumer are present in multiple categories. players like Colgate. GSK Consumer. health beverages. 850 bn.1: Components of FMCG sector Soaps 10% 32% 12% Detergent Hair Oils Shampoo 4% 3% 5% 2% 3% 5% 10% 5% 7% 1% 1% Oral Care Hair Colour Skin Care Branded Tea Coffee Snacks & Conf Biscuits Health bev Fruit drinks & Juice 30 . Nestle on the other hand is a pure food company and has presence across several food sub –categories. The components of the FMCG industry are depicted in pie chart shown below: e re Figure 5.MAJOR PLAYERS COMPONENTS OF THE FMCG INDUSTRY The approximate size of the Indian FMCG market is pegged at Rs. Britannia and Marico have established market leadership in their respective segments of oral care. biscuits and hair oils respectively. detergents. categories and have established their strong presence across different segments.

Dabur. Britannia. Thus. Nigeria. Colgate Palmolive and Godrej Consumer Products Limited are looking for acquisition of FMCG companies in developing nations and countries like South America. maintaining margins at the current levels is likely to be a difficult task for the FMCG companies.Major players in the industry like HUL. with competitive pressures (to maintain/ regain/ grow market shares and volumes) remaining high and advertising spends possibly coming down to some extent (as raw material cost benefits get exhausted). South Africa. etc. where there is a huge untapped market potential. ITC. 31 .

941.63 32.71 4.155.49 8.4 222.67 11.28 2.176.20 8.84 6.58 27.408.22 33.02 21.176.95 17.59 120.960.1: Trading Comparables-FMCG Sector Particulars (Rs Crore) Company HUL ITC GCPL Dabur Marico Colgate Mean Median 20.37 347.16 20.222.37 316.05 18.1 522.13 37.98 308.15.241.67 7.500. 32 .00 248.01 3.15 1.51 1.71 12.35 33.927.82 5.59 190.28 5.95 107.10 423.16 13.49 4.167.55 473.048.20 2.26 12% 22% 19% 16% 7% 22% 57.921.58 58.68 31.12 373.36 43.48 6.58 26.70 27.567.70 5.945.51 11.32 28.28 18.5.519.27 421.28 17.55 142.15.53 4.77 38.95 17.40 138.03 Sales (in crores) EBITDA % EV/ Sales EV/ EBITDA EBITDA PAT PAT % Mcap Debt Cash EV PE The average Sales (trading) multiple is 6x and the average EBITDA (trading) multiple is 28x for the companies in the FMCG sector.39 7.40 27.37 16% 36% 25% 20% 12% 27% 2.33 1.40 10.85 10.85 1.697.45 1.689.677.061.2 TRADING COMPARABLES Table 5.12 43.504.25 33.274.

48 40.18 The average Sales (transaction) multiple is 2x for the companies in the FMCG sector.3 TRANSACTION COMPRABLES Table 5. 33 .75 Amount Invested (Mn USD) 16 232.02 2.5.33 2.8 Stake 100% 55% 72.15% Valuation(Mn USD) 16 422.54 V/S 1.19 3.69 56.2: Transaction Comparables-FMCG Sector Year 2010 2010 2008 Mean Target Company Argencos Godrej Sara Lee Fem Investor/Acquirer GCPL GCPL Dabur Sales(Mn USD) 12 193 18.

Investors who are interested in the profile of the company will contact Pears and request for more information. Once this is through. PwC). Deloitte. After signing the Non disclosure Agreement. after analyzing the IM. clients get the funding from the investors. Once this is done.CHAPTER 6 ROLE OF PEARS 6. a detailed financial modelling and business valuation would be performed for the client. Pears understands more about the business. Investors and clients may have multiple meetings before finally agreeing to merge. meet the clients or have conference calls with them to understand about the top management of the company. The investors. many companies are contacted to explore options of raising Private Equity for them. Pears signs a Non Disclosure Agreement with the prospective investor and reveals the name of the company along with a detailed Information Memorandum (IM) which describes everything about the company.1 PE PROCESS AT PEARS The iBanking process at Pears starts with Business Development wherein. business plan. A teaser is a short description of the company on a no name basis which is floated by many investors. 34 . they engage Pears Capital as exclusive bankers. Once a client is interested. Term sheet negotiation is the next stage in the process where in all the Terms and Conditions for both the investors and clients would be laid down categorically. its revenue streams and future growth potential. Pears Capital then runs these opportunities by many PE investors by sending them a teaser about the opportunity. a due diligence would be performed on the company. financial modelling and valuation by one or more of the BIG FOUR (KPMG. E&Y. projections. Based on this.

including pre-clinical development. Although there are few barriers to entry for small. Contract research organisations (CROs) may be relatively younger than the pharmaceutical companies they partner with. In recent years. clinical data management. the effect has been almost amoeba-like. Contract research is a multi-billion dollar industry. study design. biotechnology and medical device industries. and finally creates an entire industry with its own ecosystem. the future appears rosy. The CRO industry provides independent product development services for the pharmaceutical. but they have grown substantially to stand shoulder-to-shoulder with them. limited-service providers. Companies in these industries outsource product development services to CROs in order to manage the drug development process more efficiently and to cost-effectively maximize the profit potential of both patentprotected and generic products. the CRO industry has experienced consolidation. bio statistical analysis. The CRO industry has evolved since the 1970s from a small number of companies that provided limited clinical services to a larger number of CROs that offer a range of services that encompass the entire research and development process. the ability to manage simultaneously complex clinical trials in numerous countries. post marketing surveillance. resulting in the emergence of a select group of CROs that 35 . where each outsourced function grows into a company. With demand for CRO services expected to increase by 16% annually over the next five years. The CRO industry is highly fragmented.6.2 PROJECT RADIANT-A CRO OPPORTUNITY INDUSTRY OVERVIEW Ever since pharmaceutical companies started outsourcing functions. consisting of several hundred small. clinical trials management. broad therapeutic expertise and the development and maintenance of the complex information technology systems required to integrate these capabilities. limited-service providers and a limited number of medium-sized and large CROs with global operations. CROs are required to provide these services in accordance with good clinical and laboratory practices. there are significant barriers to becoming a CRO with global capabilities. Some of these barriers include the infrastructure and experience necessary to serve the global demands of clients. as governed by the applicable regulatory authorities. central laboratory and regulatory affairs services.

Clinical Research with a 35 percent share of the market is the second largest segment contributing to more than one-fourth of the revenues in this industry followed closely by Drug discovery and Dosage form Development at 25 percent and 20 percent. This trend will further concentrate the market share among CROs with a track record of quality.3 billion and. rather than utilizing many CRO service providers. biotechnology and medical device companies. Some large pharmaceutical companies. are set to reach $19. responsiveness. including drug discovery. global capabilities and overall development experience and expertise. India and China's drug outsourcing discovery markets combined are currently worth around $7. are selecting a limited number of CROs who are invited to bid for projects. speed.have the capital. integrated global capabilities and expertise to conduct multiple phases of clinical trials on behalf of pharmaceutical. India's status as an information technology superpower. API Manufacturing is the largest contributor to outsourcing market with a 55 percent share. technical resources. 36 .1 shows the same. with access to specialist skills and 24/7 work hours.8 billion in 2011. respectively and figure 6. flexibility. is a huge advantage as it strengthens its position as the destination of choice for contract research. driven by government initiatives to diversify the drug discovery portfolio and develop infrastructure.

Fig 6. with an efficient and effective data management system will survive. From the above estimates. COMPANY OVERVIEW Roxaane Research Limited founded in August 2007 began its operations in the year 2009. The players meeting the industry expectations of increased adoption of global standards. biotechnology and medical device industries. Clinical Research Training. In a highly fragmented industry. Analytical. The main services provided are Preclinical. They have the operational flexibility to provide development services on a stand-alone basis or as part of an integrated “full service” solution. Roxaane is one of a small group of organizations with the capability and expertise to conduct clinical trials in all major therapeutic areas on a global basis. it is evident that the Indian CRAMS story has just scaled the ‘tip of the iceberg’ and ‘sky is the limit’ for the companies that have ventured into this space. Biotechnological. Clinical Trials (Phase I-IV). Headquartered in Chennai. Clinical Data Management. regulatory compliances and the pressures of cost and cycle time reductions in drug development.1 Utilization of outsourcing across key industry value chain components India is likely to account for 3-4 percent of the global contract outsourcing industry. Roxaane Research Limited is an Independent Contract Research Organisation. Formulation Development 37 and Bioinformatics services to the . providing outsourced development services on a global basis to the pharmaceutical.

multinational projects. TRANSACTION OVERVIEW The company is looking to raise Private Equity in order to fund the operation of its deal pipeline. The company has been profitable since the first year of operations and has a clear road map for the future. The industry focus is mentioned below: • • • Life sciences Technology Emerging sectors Ventureast will invest upto 15 million USD in the prospective company. Pears Capital is working on the project and the financial modeling was done for the same. However their core Clinical Research business specializes in the planning. management. ranging from small studies to complex.Pharmaceutical and Biotechnological industries. INVESTOR OVERVIEW As part of its fund management plans. Roxaane Pears Capital Ventureast The valuation is 4 times Sales and 15 times EBITDA. execution and analysis of Phase I – IV clinical trials. Ventureast is keen on partnering with entrepreneurs in any stage of business. The valuation for Roxaane is shown in following tables: 38 .

00.00.000 1.00.00.750 62.000 3.500 CDM Data Entry Medical Coding Projects( End to End) Combined Revenues 10.00.000 0 24.75.00.10.000 21.26.40.00.500 32.80.22.12.00.00.500 39 .000 5.000 27.80.00.000 5.000 PV/BS Revenue 2.000 18.43.55.03.000 14.70.00.00.25.58.33.00.35.000 CT / BE BE CT Combined Revenues BE/CT.62.000 8.00.750 27.00.70.00.000 14.000 Total Revenue 38.000 71.00.62.78.00.94.49.00.000 8.01.24.00.00.000 9.Direct Project related costs Net Revenues 1.00.000 3.Table 6.000 11.98.000 4.94.15.000 14.000 1.00.04.72.27.500 43.73.15.500 1.000 5.000 24.86.00.000 3.500 1.000 23.000 0 14.30.000 45.80.000 2.00.58.55.000 9.84.00.1: Revenue Assumption Sheet Annual Revenue in Cr Service Industry FY11E FY12E FY13E FY14E IT/ITES Revenue 18.000 10.00.40.50.00.37.00.000 32.84.000 18.000 35.00.40.000 14.00.00.00.40.00.12.90.00.00.36.40.03.40.000 24.90.000 1.43.00.00.89.000 5.37.00.00.

46 63. Cr % of Revenues FY11E FY12E FY13E FY14E Revenues 38.37 12.37 2.49 Expenditure Salary Marketing Rent & Maintenance 30% 10% 15% 11 4 6 19 6 9 31 10 15 45 15 23 EBITDA EBITDA % 17 45% 28 45% 46 45% 68 45% Interest Depreciation PBT Tax PAT 2.8 2 12.15 62.94 41.Table 6.8 1.02 150.94 103.46 63.8 1.8 1.8 23.72 2.62 41.2: P&L statement Particulars in Rs.72 23.46 40 .94 2.

7 135.7 21.0 3.9 1.509 19.602 15.9 41 .879 9.4 0.5 25.6 FY13E 41.66 0.9 10.Table 6.4 0.1 0.0 0.0 39.6 10.0 11.8 5.3: Discounted Cash Flow Statement DCF Rs.5 1.9 5. Cr PAT Depreciation Working Capital Changes ( 25% of PAT) Capital Expenditure FCF Computation of Discount Rate (WACC) Cost of Equity ( Ke) Cost of Debt (Kd) After Tax Cost of Debt ( 1.T ) * Kd Proportion of Equity in the capital structure Proportion of Debt in the capital structure Hurdle rate WACC = ( Ko) Discount rate at the cut off rate DISCOUNTED CASH FLOWS Terminal Value Growth rate Discounted Terminal Value PV ( Business ) Average Debt Value to Equity Shareholders FY11E 12.1 156.3 FY12E 23.5 15.4 2.7 1.34 0.7 15% 101.34 25% 15% 15% 0.5 7.0 14.9 198.713 10.66 18% 0.1 Capital Debt Equity 331005033 0.6 FY14E 63.

115 391 291 30 79 54 1 0 6.4: Trading Comparables TRADING COMPARABLES Particulars (Rs Crore) Sales Company EBITDA EBITDA % PAT PAT % Mcap Debt Cash EV EV/ Sales EV/ EBITDA PE Aurobindo Pharma Elder Pharma Dishman Pharma Accentia Technology Mean Median 2.944 1.105 443 2 2 5 6 4x 4x 21 9 15 14 15x 14x 9 12 26 23 18x 18x 42 .Table 6.908 673 1.795 620 416 79 323 108 142 31 12% 17% 34% 40% 129 49 93 21 5% 8% 22% 27 4.815 413 2.010 2.

Crore DCF Trading Comparables – Domestic Transaction Comparables Mean 135 141 132 136 STATUS OF THE DEAL Pears Capital is awaiting the final confirmation from Ventureast to fund Project Radiant. The discussion with investors and the company are in the final stages and is expected to close soon.5: Transaction Comparables TRANSACTION COMPARABLES Target Acquirer Txn Value (Mn USD) Sales Multiple Taro Sun pharma Sanofis Aventis Mylan Wockhardt Mean 454 1.8 3x Table 6.7 1. 43 .Table 6.8 2.6: Valuation Table VALUATION In Rs.5 Shantha Biotech Merck Negma 781 6700 265 7.

While international peers are trading at 13-26x CY09E. 44 . And in the FMCG sector the hunger for growth is driving the domestic fast moving consumer goods (FMCG) companies to snap up new firms and brands across the globe. FMCG majors are increasingly focusing on expanding their global footprint by acquiring companies in niche segments to fill gaps in their product portfolio. tutoring. Many of the Big Education players like Educomp. Indian companies are trading at 7-22x FY10E. Sectors such as pre-schools. the valuation gap between domestic peers and international players should narrow. The current valuations in the education sector do not reflect the true potential as the sector is still evolving and there are only few listed companies in India. offers enormous opportunities for private players. These areas are attractive because while they relate closely to the profitable K-12 segment. With these companies building scalable business models. they are largely unregulated. IT training and elearning are prime sectors in which private players can allocate their funds. TutorVista. and a sustained volume growth. As such. the acute shortage of trained teachers and quality schools combined with cash-strapped governments would open the doors for corporates to capitalize on this opportunity. and are currently trading at rich valuations that are being driven by a steady Earnings growth. they make attractive propositions for private investors interested in taking advantage of the burgeoning demand for quality education. provision of multimedia content. Companies with scalable model and growth visibility would get better valuations. Despite regulatory constraints.CHAPTER 7 FINDINGS AND CONCLUSIONS The Indian education sector. estimated at US$75bn. Most FMCG companies have witnessed a sharp rally in the recent past. significant Margin expansion. Edserv & Everonn are riding on availability of high PE funds to gobble up more acquisitions as providing an integrated product will win them more clients in future rather than focusing on niche services.

An increasing number of CROs will enter a variety of strategic partnership deals in order to expand their service offerings and geographical presence. US. This process has significantly helped in understanding the market players in the Education. Education. The corporate landscape has witnessed dynamic changes in the recent years as mergers and acquisitions. it is relatively young. I have closely interacted with investors in these two months and observed that there are so many deal opportunities. That means many smaller and mid-sized contractors could be buyout or merger bait. as valuations remain tepid in most parts of the world. With respect to the contract research organization industry. In that context. and Japan. Pears also focuses on providing both buy-side and sell-side advisory services as part of its M&A advisory offering it typically handles deals which are less than US $20 Million. with a market share of almost 17 percent). The overseas acquisitions by Indian companies indicate that they are prepared to compete globally. Healthcare and Media/Entertainment. Pears’ focus in this process as an investment bank is to assist companies in raising the necessary capital to meet their growth objectives by providing end-to-end advisory solutions to companies in high-growth markets on their capitalization/re-capitalization strategies.100-plus CRO companies the top 10 players only accounted for 56. Indian companies today are in league with the traditional multinationals from Europe. Pears Capital targets many companies in these sectors to explore deal possibilities. Estimates of the industry's size are difficult given that most CROs including some of the largest are privately held. Business Valuation has become an intrinsic part of the corporate landscape. and share repurchases are happening in record 45 .These cash-rich companies have been waiting for the right moment and it seems to be now. Having been a part of Pears Capital for over two months. FMCG and CRO space. external capital often becomes a catalyst to achieving market leadership. And there's plenty of room for consolidation: of the 1. Services are what CROs are made of and today’s promising market certainly has the potential to keep them busy. To capitalize on a given sector's robust demand. Close interaction with various clients in each of the sectors facilitated in gaining a clear understanding of the business models. I also happened to interact with more than 30 companies to explore their interest levels in raising Private Equity. Thus.1 percent of the global market (Quintiles is the largest. Attractive sectors for most investors are Food & Beverage. corporate restructurings. the importance of investment banks in this process.

numbers. but also helped in understanding the process of providing strategic. 46 . both in the India and abroad. financial and valuation advisory services to clients of Pears Capital. At the core of the dynamics of all these activities stands some notion of valuation. This practical exposure not only helped in gaining a clear understanding of the concept of business valuation with respect to Mergers and Acquisitions and Private Equity syndication. Thus a thorough analysis of the company and industry reports helped in tracking the industry deals and also understanding the valuation trends.

ANNEXURE 47 .

com/finance Available from: http://www. [online] Available from: http://docs.google.html Patrick A.investopedia.REFERENCES Available from: http://www. Gaughan.moneycontrol.mydigitalfc.com/blog/ Available from: http://www.com/ Available from: http://in.com/home.vu.org/ Available from: http://www.com/finance/deals Available from: http://dealcurry.com/ Available from: http://www.com/ Available from: http://www.business-standard.pearscapital.com/ Available from: http://business.htm Available from: http://www.edu/~sif/Investm ent%2520Banking.indiape.vccircle.wikipedia. MERGERS AND ACQUISITIONS: AN OVERVIEW.google.com/viewer?a=v&q=cache:PhgkwGiqwV8J:https://web. 2001.com/knowledge/india-turns-hub-clinical-researchoutsourcing-105 [26 May 2009] Available from: http://www.com/ 48 .com/india/news/fmcg-firms-develop-appetite-foracquisitions-abroad/396534/ [Accessed 31st May 2010] Available from: http://researchonindia.pdf+report+on+investment+banking+pdf&hl=en&gl=in&pid=bl&srcid=ADGEES gLjbhXJf8OauBxOXwPEV0kIuB6aFPwA4hrSk805iYdxhPlePNHnD9o6YZY7hy14hE0Kgly_F8Ni Gxk7m0KHMMBEw8f9QNbF7FC00PsA6nskrIu3FMHJ85HAie6FjW4Fe7yDMF&sig=AHIEtbSc3YeW9 AlrU4sSZUDyQVeLJjDNpw Available from: http://www.mapsofindia.reuters.union.com/investment-industry/investment-banks.onesource.com/tag/healthcare/ Available from: http://www.

International Private Equity and Valuation Guidelines Available from: http://www. Indian Education Sector.html [Accessed 3 May 2010] IDFC SSKI. 2009.free-press-release. 49 . 2009.com/news-top-opportunities-in-educationsector-to-grow-by-30-35-1272889607. Editorial.INTERNATIONAL PRIVATE EQUITY AND VENTURE CAPITAL VALUATION GUIDELINES BOARD.

It is a measure of company’s value. It is an indicator of a company’s financial performance. EV: Enterprise Value is referred to as EV. It is calculated by multiplying the current market price per share by the number of shares outstanding. depreciation and tax. minus total cash and cash equivalents. When a company is valued using EBITDA it is known as EBITDA valuation. because it takes into account debt. EBITDA= Revenue – Expenses (excluding tax. minority interest and preferred shares.GLOSSARY EBITDA: Earnings before Interest Tax Depreciation and Amortization is referred to as EBITDA. 50 . It is calculated as Mcap plus Debt. P/E: Price-Earnings ratio is a valuation ratio of a company’s current share price as compared to its earnings per share. EV/SALES: A valuation measure that compares the enterprise value of a company to its sales. The enterprise multiple looks at a firm as a potential acquirer would. EV/EBITDA: EV/EBITDA is known as the enterprise multiple or EBITDA multiple. It gives the investor an idea of how much it costs to buy the company’s sales. depreciation and amortization) PAT: Profit after tax is referred to as PAT. It the net profit earned by the company after deducting all expenses like interest. interest. MCap: Market Capitalization is popularly referred to as Mcap or MarketCap. Calculated as Market price per share / EPS.

Free cash flow represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. FCF= Net Income+ (Amortization/Depreciation)-(Changes in WC)-(Capital expenditures) TV: Terminal value is referred to as TV. It serves as an indicator of profitability. FCF: Free Cash Flow is referred to as FCF. It is a valuation method used to estimate the attractiveness of an investment opportunity. 51 . determined by dividing one metric by another metric. It is calculated as (Net Income.Market Price: The current price at which an asset or service can be bought or sold. DCF: Discounted cash flow is referred to as DCF. EPS: The portion of the company’s profit allocated to each outstanding share of common stock.Dividend on preferred stock) / Average outstanding shares. This analysis uses future cash flow projections and discounts them to arrive at the present value. It is the value of an investment at the end of a period. The formula to calculate terminal is the same as that for compound interest: TV= P*(1+r)t MULTIPLE: A term that measures some aspect of a company's financial well-being. taking into account a specified rate of interest.

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